Do Nonfinancial Firms Use Financial Assets to Take Risk?

50 Pages Posted: 8 Dec 2018 Last revised: 15 Jun 2021

See all articles by Zhiyao Chen

Zhiyao Chen

The Chinese University of Hong Kong (CUHK) - Department of Finance

Ran Duchin

Boston College - Carroll School of Management

Date Written: June 15, 2021

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 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.

Keywords: Cash Holdings, Short-term debt, Rollover Risk, Investment Securities, SFAS 157, Fair Value

JEL Classification: G30, G32, G33

Suggested Citation

Chen, Zhiyao and Duchin, Ran, Do Nonfinancial Firms Use Financial Assets to Take Risk? (June 15, 2021). Available at SSRN: https://ssrn.com/abstract=3284205 or http://dx.doi.org/10.2139/ssrn.3284205

Zhiyao Chen (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong

Ran Duchin

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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