Do Firms Engage in Risk-Shifting? Empirical Evidence

Gilje, Erik

doi:10.1093/rfs/hhw059

Cited by 124 publications

(45 citation statements)

References 24 publications

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“…Although the notion that debt affects firms’ investment decisions has been prominently featured in the finance literature, the evidence we report is inconsistent with traditional distortions such as asset substitution (see, e.g., Gilje (2016) for an overview) or debt‐overhang‐related underinvestment (see, e.g., Melzer (2017) for an overview). Our results point to a previously unrecognized debt‐related distortion as the documented deadweight loss stems from acceleration (not delay ) of investments.…”

Section: Figurecontrasting

confidence: 80%

“…In comparing well completion decisions before and during contango, we find that on average high‐leverage firms start producing 1.0 months earlier during contango, resulting in a 4.8% loss in project NPV, or $124,000 per project. This effect is nonlinear and is concentrated among high‐leverage firms (consistent with Gilje (2016), Chava and Roberts (2008), Bharath and Shumway (2008), who document other debt‐related investment effects). The documented effect cannot be explained by firm heterogeneity in profitability, size, and market‐to‐book.…”

Section: Figuresupporting

confidence: 73%

“…Using production data on a broad set of wells across public and private companies, we verify that on average single‐well leases exhibit both lower initial production and a lower standard deviation of production realizations. This evidence is not consistent with risk‐shifting but rather is congruent with arguments presented by Gilje (2016).…”

Section: Empirical Analysis and Resultssupporting

confidence: 55%

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Drilling and Debt

Gilje¹,

Loutskina²,

Murphy

2020

The Journal of Finance

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This paper documents a previously unrecognized debt-related investment distortion. Using detailed project-level data for 69 firms in the oil and gas industry, we find that highly levered firms pull forward investment, completing projects early at the expense of long-run project returns and project value. This behavior is particularly pronounced prior to debt renegotiations. We test several channels that could explain this behavior and find evidence consistent with equity holders sacrificing long-run project returns to enhance collateral values and, by extension, mitigate lending frictions at debt renegotiations. * Erik P. Gilje is with the Wharton School, University of Pennsylvania and NBER. Elena Loutskina and Daniel Murphy are with the University of Virginia Darden School of Business. We would like to thank

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Section: Figurecontrasting

confidence: 80%

Section: Figuresupporting

confidence: 73%

Section: Empirical Analysis and Resultssupporting

confidence: 55%

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Drilling and Debt

Gilje¹,

Loutskina²,

Murphy

2020

The Journal of Finance

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“…Some work shows that financial innovations can be driven by adverse incentives (Pérignon and Vallée (2017)), whereas we show that financial innovations themselves may create adverse incentives. Finally, our paper also contributes to an empirical literature documenting agency costs (e.g., Gilje (2016)). …”

Section: Introductionmentioning

confidence: 82%

The Agency of CoCo: Why Do Banks Issue Contingent Convertible Bonds?

2017

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Why do banks issue contingent convertible debt? To answer this question we study comprehensive data covering all issues by publicly traded banks in Europe of contingent convertible bonds (CoCos) that count as additional tier 1 capital (AT1). We find that banks with lower asset volatility are more likely to issue AT1 CoCos than their riskier counterparts, but that CDS spreads do not react following issue announcements. Our estimates therefore suggest that agency costs play a crucial role in banks' ability to successfully issue CoCos. The agency costs may be higher for CoCos than for equity explaining why we observe riskier or lowly capitalized banks to issue equity rather than CoCos.JEL-Classification: G01, G12, G24

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“…Despite its pension context, our paper adds to the vast risk shifting literature in a general setting. Theoretically, risk shifting is expected to be especially severe among distressed firms, but positive empirical evidence from prior studies is limited (Andrade and Kaplan, 1998;Graham and Harvey, 2001;Eisdorfer, 2008;Purnanandam, 2008;Gilje, 2014;Pryshchepa et al, 2014). Some studies explain that distressed firms may find it hard to shift risk due to financing difficulty or protective covenants imposed by creditors (Boyle and Guthrie, 2003;Nini et al, 2009).…”

Section: Introductionmentioning

confidence: 99%

The Effect of Regulations on Pension Risk Shifting: Evidence from the US and Europe

Guan¹,

Lui

2016

Business Fin & Account

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This paper provides evidence that pension regulations can incentivize or curb risk shifting in the investment of defined benefit (DB) plan assets. We document that in the U.S., whereby the pension insurance premium charged by the Pension Benefit Guaranty Corporation (PBGC) is largely flat, financially distressed firms with severely underfunded plans shift pension investment risk. We further find that risk shifting is mitigated in the U.K. after the implementation of risk-adjusted pension insurance premium, and in the Netherlands where full pension funding is mandatory. Overall the results in this paper lend support to the view that structural flaws in the U.S. statutory pension insurance scheme incentivize high-risk sponsors to gamble their pension assets when distress terminations of their plans become foreseeable. JEL Classification: G11; G30; G32

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Do Firms Engage in Risk-Shifting? Empirical Evidence

Cited by 124 publications

References 24 publications

Drilling and Debt

Drilling and Debt

The Agency of CoCo: Why Do Banks Issue Contingent Convertible Bonds?

The Effect of Regulations on Pension Risk Shifting: Evidence from the US and Europe

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