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How Important Is Financial Risk?

Published online by Cambridge University Press:  13 November 2015

Söhnke M. Bartram ,
Gregory W. Brown  and
William Waller
Söhnke M. Bartram
Affiliation:
s.m.bartram@wbs.ac.uk, Warwick University, Business School, Coventry CV4 7AL, UK
Gregory W. Brown*
Affiliation:
gregwbrown@unc.edu, University of North Carolina–Chapel Hill, Kenan-Flagler Business School, Chapel Hill, NC 27599.
William Waller
Affiliation:
william_waller@unc.edu, University of North Carolina–Chapel Hill, Kenan-Flagler Business School, Chapel Hill, NC 27599.
*
*Corresponding author: gregwbrown@unc.edu
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Abstract

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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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 4 , August 2015 , pp. 801 - 824
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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