Abstract
Using hand-collected data on financial asset portfolios and exploiting the 2014 oil price crisis as an exogenous cash flow shock, we investigate financial risk-taking at distressed firms. We find that distressed firms, with high debt rollover risk proxied for by short-term liabilities, substantially increase their investments in risky financial assets, including corporate debt, equity, and mortgage-backed securities. The effects are stronger for unhedged firms with low collateral assets. Overall, we provide new evidence that distressed firms take risk using financial assets camouflaged as cash reserves, which, compared to real assets, are less visible and carry lower transaction costs and accelerated payoffs. © 2022 The Author(s).
| Original language | English |
|---|---|
| Pages (from-to) | 1-37 |
| Journal | The Review of Corporate Finance Studies |
| Volume | 13 |
| Issue number | 1 |
| Online published | 30 Nov 2022 |
| DOIs | |
| Publication status | Published - Feb 2024 |
| Externally published | Yes |
Funding
Zhiyao Chen acknowledges financial support from the General Research Fund by the Hong Kong Research Grants Council [project 14505318].