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Corporate Finance: Risk Management

Paper Session

Sunday, Jan. 3, 2021 10:00 AM - 12:00 PM (EST)

Hosted By: American Finance Association
  • Chair: Jarrad Harford, University of Washington

Corporate Responses to Stock Price Fragility

Richard Friberg
,
Stockholm School of Economics
Itay Goldstein
,
University of Pennsylvania
Kristine Hankins
,
University of Kentucky

Abstract

We study whether stock price fragility (exposure to non-fundamental demand shocks) stemming from changes in the composition of equity ownership poses a salient corporate risk. We model ex-ante corporate responses to higher potential for future stock market misvaluation and then empirically document within firm effects in line with the model: higher fragility raises cash holdings and lowers investment. Multiple natural experiments support a causal interpretation and the results are more prominent in the face of high uncertainty and financial constraints. The evidence presents a new dimension in the feedback channel which connects the stock market and corporate policies.

Corporate Climate Risk: Measurements and Responses

Qing Li
,
University of Florida
Hongyu Shan
,
Fordham University
Yuehua Tang
,
University of Florida
Vincent Yao
,
Georgia State University

Abstract

This paper constructs a novel measure of climate risk at the firm level by adopting a textual analysis method. The measure captures the share of conversations on earnings conference calls that center on climate- and weather-related keywords, allowing us not only to construct a total climate risk measure but also to obtain disaggregated climate risk measures, such as those related to long- versus short-run factors, as well as corporate functions affected by climate risk. We analyze the determinants of firm-level climate risk using natural disasters and firm attributes and find that 60% of its variation is due to within-firm variation, and thus it mostly captures idiosyncratic risk at the firm level. We also examine the relation between climate risk and stock price volatility, as well as firm responses to climate risk. The results suggest that firms with higher unexpected climate risk significantly increase their investment while decreasing their employment in subsequent years.

Hedging, Liquidity, and Productivity

Guojun Chen
,
Nanyang Technological University
Zhongjin Lu
,
University Of Georgia
Siddharth Vij
,
University of Georgia

Abstract

We study the effects of liquidity and productivity on corporate hedging decisions using a comprehensive dataset of oil and gas producers. Over a longer sample period than prior literature, we discover that hedging intensity is positively correlated with unrealized hedging gains and output prices, but negatively with operating cash flows. These new empirical patterns together challenge existing risk management models as unrealized hedging gains represent an unexpected shock to internal liquidity, while both operating cash flows and output prices are positively related to productivity. Incorporating procyclical collateral capacity and production-dependent depreciation into existing models can explain our empirical findings.
Discussant(s)
Ming Dong
,
York University
Tim Loughran
,
University of Notre Dame
David Haushalter
,
Pennsylvania State University
JEL Classifications
  • G3 - Corporate Finance and Governance