The data that support the findings of this study are publicly available from the sources noted in the text. CONFLICT OF INTEREST STATEMENTThere is no conflict of interest to declare.

We study whether industrial firms risk-shift in response to distress risk increases induced through hurricane strikes. Using new proxies capturing deliberate managerial decisions about the risk of a firm’s operating segment portfolio, differences tests suggest that hurricane strikes prompt moderately, but not highly, distressed firms to skew their asset mixes toward riskier segments by shutting down low-risk, high-average-Q segments. In turn, the moderately distressed firms observe abnormally high failure rates after a hurricane strike. Employing covenant violation data, we offer further evidence that creditor control prevents highly distressed firms from raising their risk. Our conclusions extend those of other studies by suggesting that moderate distress risk levels can lead the managers of industrial firms to not only engage in risk-taking, but, in fact, in risk-shifting.

Research question/issue This paper examines how enhanced monitoring by corporate boards following the passage of the Sarbanes-Oxley Act of 2002 and concurrent reforms to stock exchange rules (SOX) mitigated risk-related agency conflicts prevalent in entrenched firms.Research findings/insights Post-SOX, entrenched firms increased risky and valueenhancing investments. These investments were financed by reductions in financial slack and dividend payouts and by lower cost of debt. The specific mechanism driving the positive changes in corporate policies of entrenched firms is the SOX requirement of an independent compensation committee. Managers of entrenched firms previously noncompliant with this requirement are rewarded with more equity-based pay after SOX, which strengthened their incentives to pursue value-creating riskier investments. Only firms with low information asymmetry benefit from this requirement.Theoretical/academic implications The paper provides evidence of a disciplining effect of the critically important governance legislation on firms with entrenched management. The findings suggest that, by imposing an additional layer of discipline on managers, SOX increased managers' willingness to take on riskier but more valueenhancing projects that were previously stifled in entrenched firms. The paper underscores the roles of an independent compensation committee and information cost in alleviating managerial risk avoidance.Practitioner/policy implications The paper has implications for the ongoing debate among policymakers and legislators on the costs and benefits of SOX and for future governance reforms. Legal enforcement of stricter board requirements can realign investment policies with shareholders' interests even in the presence of valuereducing firm-specific arrangements that entrench managers. However, majority independent board and fully independent audit and compensation committees do not rein in chief executive officer (CEO)'s risk aversion. It is a fully independent compensation committee that is instrumental in incentivizing CEOs to pursue risky projects that also add value. Firms and policymakers need to be aware that the effectiveness

Changes made as a result of publishing processes such as copy-editing, formatting and page numbers may not be reflected in this version. For the definitive version of this publication, please refer to the published source. You are advised to consult the publisher's version if you wish to cite this paper.

No abstract