Skip to main content Accessibility help
×
Home

How Important Is Financial Risk?

  • Söhnke M. Bartram (a1), Gregory W. Brown (a2) and William Waller (a3)

Abstract

We explore the determinants of equity price risk of nonfinancial corporations. Operating and asset characteristics are by far the most important determinants of risk. For the median firm, financial risk accounts for only 15% of observed stock price volatility. Furthermore, financial risk has declined over the last 3 decades, indicating that any upward trend in equity volatility was driven entirely by economic risk factors. This explains why financial distress (as opposed to economic distress) was surprisingly uncommon in the nonfinancial sector during the 2007–2009 crisis even as measures of equity volatility reached unprecedented highs.

    • Send article to Kindle

      To send this article to your Kindle, first ensure no-reply@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about sending to your Kindle. Find out more about sending to your Kindle.

      Note you can select to send to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be sent to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

      Find out more about the Kindle Personal Document Service.

      How Important Is Financial Risk?
      Available formats
      ×

      Send article to Dropbox

      To send this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Dropbox.

      How Important Is Financial Risk?
      Available formats
      ×

      Send article to Google Drive

      To send this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Google Drive.

      How Important Is Financial Risk?
      Available formats
      ×

Copyright

Corresponding author

*Corresponding author: gregwbrown@unc.edu

References

Hide All
Acharya, V. V.; Almeida, H.; and Campello, M.. “Is Cash Negative Debt? A Hedging Perspective on Corporate Financial Policies.” Journal of Financial Intermediation, 16 (2007), 515554.
Altman, E. I. “Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy.” Journal of Finance, 23 (1968), 589609.
Bartram, S. M. “Corporate Post-Retirement Benefit Plans and Leverage.” Review of Finance, forthcoming (2015).
Bartram, S. M.; Brown, G. W.; and Conrad, J.. “The Effects of Derivatives on Firm Risk and Value.” Journal of Financial and Quantitative Analysis, 46 (2011), 967999.
Bartram, S. M.; Brown, G. W.; and Fehle, F. R.. “International Evidence on Financial Derivatives Usage.” Financial Management, 38 (2009), 185206.
Bates, T. W.; Kahle, K. M.; and Stulz, R. M.. “Why Do U.S. Firms Hold So Much More Cash Than They Used To?” Journal of Finance, 64 (2009), 19852021.
Black, F., and Cox, J. C.. “Valuing Corporate Securities: Some Effects of Bond Indenture Provisions.” Journal of Finance, 31 (1976), 351367.
Black, F., and Scholes, M.. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, 81 (1973), 637654.
Brown, G. W. “Managing Foreign Exchange Risk with Derivatives.” Journal of Financial Economics, 60 (2001), 401448.
Brown, G. W., and Kapadia, N.. “Firm-Specific Risk and Equity Market Development.” Journal of Financial Economics, 84 (2007), 358388.
Cao, C.; Simin, T.; and Zhao, J.. “Can Growth Options Explain the Trend in Idiosyncratic Risk?” Review of Financial Studies, 21 (2008), 25992634.
Choi, J., and Richardson, M. “The Volatility of the Firm’s Assets.” Working Paper, New York University (2009).
Christie, A. A. “The Stochastic Behavior of Common Stock Variances: Value, Leverage and Interest Rate Effects.” Journal of Financial Economics, 10 (1982), 407432.
Cornaggia, K.; Franzen, L.; and Simin, T.. “Manipulating the Balance Sheet? Implications of Off-Balance-Sheet Lease Financing.” Working Paper, Pennsylvania State University (2011).
Dichev, I. D. “Is the Risk of Bankruptcy a Systematic Risk?” Journal of Finance, 53 (1998), 11311147.
Eom, Y. H.; Helwege, J.; and Huang, J.. “Structural Models of Corporate Bond Pricing: An Empirical Analysis.” Review of Financial Studies, 17 (2004), 499544.
Fama, E., and MacBeth, J.. “Risk, Return and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607636.
Gilson, S. C. “Transactions Costs and Capital Structure Choice: Evidence from Financially Distressed Firms.” Journal of Finance, 52 (1997), 161196.
Irvine, P. J., and Pontiff, J.. “Idiosyncratic Return Volatility, Cash Flows, and Product Market Competition.” Review of Financial Studies, 22 (2009), 11491177.
Jovanovic, B., and Rousseau, P. L.. “Why Wait? A Century of Life before IPO.” American Economic Review, 91 (2001), 336341.
Leland, H. E., and Toft, K. B.. “Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads.” Journal of Finance, 51 (1996), 9871019.
Merton, R. C. “On the Pricing of Corporate Debt: The Risk Structure of Interest Rates.” Journal of Finance, 29 (1974), 449470.
Nelson, D. B. “Conditional Heteroskedasticity in Asset Returns: A New Approach.” Econometrica, 59 (1991), 347370.
Ohlson, J. A. “Financial Ratios and the Probabilistic Prediction of Bankruptcy.” Journal of Accounting Research, 18 (1980), 109131.
Opler, T.; Pinkowitz, L.; Stulz, R. H.; and Williamson, R.. “The Determinants and Implications of Corporate Cash Holdings.” Journal of Financial Economics, 52 (1999), 346.
Pástor, L., and Veronesi, P.. “Stock Valuation and Learning about Profitability.” Journal of Finance, 58 (2003), 17491790.
Rosenberg, B., and McKibben, W.. “The Prediction of Systematic and Specific Risk in Common Stocks.” Journal of Financial and Quantitative Analysis, 8 (1973), 317333.
Schwert, G. W. “Why Does Stock Market Volatility Change over Time?” Journal of Finance, 44 (1989), 11151153.
Shivdasani, A., and Stefanescu, I.. “How Do Pensions Affect Corporate Capital Structure Decisions?” Review of Financial Studies, 23 (2010), 12871323.
Type Description Title
PDF
Supplementary materials

Bartram supplementary material
Internet Appendix

 PDF (1.2 MB)
1.2 MB

Metrics

Altmetric attention score

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed