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Risk Shifting or Risk Management: How do Firms Hedge in Financial Distress?

Andrén, Niclas LU orcid ; Dudley, Evan and Jankensgård, Håkan LU (2020) Financial Management Association International: 2020 Annual Meeting
Abstract
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.
Abstract (Swedish)
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 thatthe uniquecharacteristic of derivative portfolios in distressed firms is a strategythat involvessold 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, thedatadoes not bear this hypothesis out.Instead, the theory that fares best in our analysis emphasizes that sold put options arepart of the optimal risk management strategy in economicallydistressed firms.
Please use this url to cite or link to this publication:
author
; and
organization
publishing date
type
Contribution to conference
publication status
unpublished
subject
keywords
Corporate hedging, risk shifting, financial distress, risk management, financial constraints, G30, G32
pages
49 pages
conference name
Financial Management Association International: 2020 Annual Meeting
conference location
New York, United States
conference dates
2020-10-19 - 2020-10-23
language
English
LU publication?
yes
id
c87573b2-c704-4481-a299-8e6cbc3350a2
alternative location
http://www.fmaconferences.org/NY2020/Papers/How_firms_hedge_in_financial_distress.pdf
date added to LUP
2020-10-29 10:31:14
date last changed
2020-10-29 11:01:52
@misc{c87573b2-c704-4481-a299-8e6cbc3350a2,
  abstract     = {{In this paper we address the question of how firms hedge in financial distress.<br/>Using hand-collected data from oil and gas producers, we show that the unique<br/>characteristic of derivative portfolios in distressed firms is a strategy that<br/>involves sold put options. This is puzzling, considering that selling put options<br/>amounts to selling insurance, which creates a new liability that distressed firms<br/>seem ill equipped to take on. While suggestive of risk shifting behaviour, the data<br/>does not bear this hypothesis out. Instead, the theory that fares best in our<br/>analysis emphasizes that sold put options are part of the optimal risk<br/>management strategy in economically distressed firms.}},
  author       = {{Andrén, Niclas and Dudley, Evan and Jankensgård, Håkan}},
  keywords     = {{Corporate hedging; risk shifting; financial distress; risk management; financial constraints; G30; G32}},
  language     = {{eng}},
  month        = {{10}},
  title        = {{Risk Shifting or Risk Management: How do Firms Hedge in Financial Distress?}},
  url          = {{http://www.fmaconferences.org/NY2020/Papers/How_firms_hedge_in_financial_distress.pdf}},
  year         = {{2020}},
}