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Risk-shifting and investment asymmetry

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  • Eisdorfer, Assaf
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    Abstract

    I show that when shareholders can change not only the variance of the future firm value, but also its asymmetry, they can shift costly risk to bondholders while lowering the firm risk, and more importantly, the equity risk and the probability of bankruptcy. The implication of this result is that risk-shifting behavior can be more beneficial to shareholders than currently perceived in the literature.

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    File URL: http://www.sciencedirect.com/science/article/B7CPP-507CRV2-2/2/72ab1dc6670b9e5f7b6f7813b726d236
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    Bibliographic Info

    Article provided by Elsevier in its journal Finance Research Letters.

    Volume (Year): 7 (2010)
    Issue (Month): 4 (December)
    Pages: 232-237

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    Handle: RePEc:eee:finlet:v:7:y:2010:i:4:p:232-237

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    Web page: http://www.elsevier.com/locate/frl

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    Keywords: Risk-shifting Investment;

    References

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    1. Assaf Eisdorfer, 2008. "Empirical Evidence of Risk Shifting in Financially Distressed Firms," Journal of Finance, American Finance Association, vol. 63(2), pages 609-637, 04.
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    13. Parrino, Robert & Weisbach, Michael S., 1999. "Measuring investment distortions arising from stockholder-bondholder conflicts," Journal of Financial Economics, Elsevier, vol. 53(1), pages 3-42, July.
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    16. John, Teresa A & John, Kose, 1993. " Top-Management Compensation and Capital Structure," Journal of Finance, American Finance Association, vol. 48(3), pages 949-74, July.
    17. Barnea, Amir & Haugen, Robert A & Senbet, Lemma W, 1980. " A Rationale for Debt Maturity Structure and Call Provisions in the Agency Theoretic Framework," Journal of Finance, American Finance Association, vol. 35(5), pages 1223-34, December.
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    Cited by:
    1. Jelisavka Bulatovic, 2011. "Application of Method of Financial Risk in Serbian Companies - Survey Sample Company," International Journal of Economics and Financial Issues, Econjournals, vol. 1(2), pages 54-73, June.

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