Niclas Andrén
Head of the Department of Business Administration
Risk Shifting or Risk Management: How do Firms Hedge in Financial Distress?
Author
Summary, in English
In this paper we address the question of how firms hedge in financial distress.
Using hand-collected data from oil and gas producers, we show that the unique
characteristic of derivative portfolios in distressed firms is a strategy that
involves sold put options. This is puzzling, considering that selling put options
amounts to selling insurance, which creates a new liability that distressed firms
seem ill equipped to take on. While suggestive of risk shifting behaviour, the data
does not bear this hypothesis out. Instead, the theory that fares best in our
analysis emphasizes that sold put options are part of the optimal risk
management strategy in economically distressed firms.
Using hand-collected data from oil and gas producers, we show that the unique
characteristic of derivative portfolios in distressed firms is a strategy that
involves sold put options. This is puzzling, considering that selling put options
amounts to selling insurance, which creates a new liability that distressed firms
seem ill equipped to take on. While suggestive of risk shifting behaviour, the data
does not bear this hypothesis out. Instead, the theory that fares best in our
analysis emphasizes that sold put options are part of the optimal risk
management strategy in economically distressed firms.
Department/s
- Accounting and Corporate Finance
Publishing year
2020-10-23
Language
English
Links
Document type
Conference paper
Topic
- Business Administration
Keywords
- Corporate hedging
- risk shifting
- financial distress
- risk management
- financial constraints
- G30
- G32
Conference name
Financial Management Association International: 2020 Annual Meeting
Conference date
2020-10-19 - 2020-10-23
Conference place
New York, United States
Status
Unpublished
Research group
- Knut Wicksell Centre for Financial Studies