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The purpose of this paper is to investigate whether higher asset risk can be associated with higher leverage and to provide a rationale for the relatively low debt ratios displayed by many firms.

A game is modeled between an informed firm and uninformed lenders. The firm knows the risk of its assets, while lenders only know the minimum level of risk. The author solves for the signaling equilibrium and derive explicit formulas for the firm’s cost of debt and optimal leverage.

In contrast to the tradeoff theory of capital structure, it is found that asset risk and leverage are positively (instead of negatively) related. Furthermore, leverage is lower than when lenders are informed about the firm’s risk. These results are illustrated with a numerical example.

Low-risk firms can choose a lower leverage to signal their lower risk and reduce their cost of debt. High-risk firms may prefer to pay higher interest rates and use higher leverage.

The paper is able to explain why some firms use surprisingly low leverage and do not appear to take advantage of their debt tax shields.

Earlier research found that firms with the highest distress risk have low book‐to‐market (B/M) ratios and low returns. This paper aims to examine the robustness of those's results and provide further evidence that high distress‐risk firms do not enjoy the same high returns earned by high B/M firms and that distress risk is unlikely to explain the Fama and French high‐minus‐low (HML) B/M factor.

A distress‐risk measure, distressed‐minus‐solvent (DMS), is calculated and a range of zero investment distress‐risk trading strategies is investigated. Value‐ and equal‐weighted portfolios are examined both with negative book‐equity firms and without. These most distressed firms have low or negative B/M values and would either not be included in the Fama and French sample or included in the low B/M portfolio.

The paper finds that the DMS factor is negative and significant, and none of the zero investment strategies earns significantly positive returns.

The findings suggest that exposure to distress risk does not earns investors a positive risk premium. It appears that over the period examined, market inefficiencies drive the market value and returns of high distress‐risk firms.

The distress‐risk premium is shown to be negative and, therefore, cannot be driven by bankruptcy risk alone. The negative premium is not consistent with a financial distress explanation for the Fama and French HML factor.

The growth in derivative activities, and the change in the way financial firms conduct these activities, has led to the development of practices within firms to manage risk. These practices relate to both the organisational context in which risk management takes place, and the measurement of market risk. Proposals and recommendations have been made in a number of reports in an attempt to encourage firms to adopt best practice, as identified by the Group of Thirty, through public disclosure requirements and rides for determining the amount of regulatory capital to support trading and derivatives activities. The adoption of best practice, together with the benefits of increased transparency and more appropriate methods for determining capital requirements, is seen to lead to a reduction in systemic risk. This paper examines the main proposals and recommendations made in the reports. In particular, the use of market risk measurement models, developed for internal risk management purposes, for public disclosures of market risk and for calculating regulatory capital is critically examined.

This paper aims to study the impact of tax avoidance on corporate risk. It also examines the moderating impact of tax risk on the relationship between tax avoidance and firm risk.

Based on available information in the DATASTREAM database about a sample of French firms listed in the CAC 40 from 2010 to 2022, the study uses the feasible generalized least squares method to investigate the impact of tax avoidance on firm risk and the moderating impact of tax risk. To check the robustness of our results, the authors changed the measurement of variables to identify potential biases and they significantly mitigated the endogeneity concerns using instrumental variable regression. Additional estimations were performed, first by using book-tax differences (BTD) and its components, i.e. temporary and permanent, and second by retesting hypotheses of years before the outbreak of the corona virus disease 2019 (COVID-19) pandemic.

The results show that tax avoidance negatively affects the firm risk while tax risk has a positive effect on firm risk. More importantly, tax risk moderates the negative impact of tax avoidance on the firm risk. When tax avoidance is associated with a high level of tax risk, it leads to a high firm risk. Accordingly, tax avoidance should be considered in conjunction with tax risk when studying the effect put on the firm risk. Further analyses indicate that tax risk moderates the negative relationship between permanent BTD and firm risk.

The major limitation of this study is that it focuses only on French-listed firms, which make it difficult to generalize the results. Furthermore, the authors did not introduce governance variables into our models. An effective governance system and transparent information can reduce some of the perverse effects of risky tax avoidance by reducing the tax avoidance costs. The obtained results are of great interest to researchers who need to include the tax risk concept in their examination of the tax avoidance impacts.

The results are useful for investors wishing to make sound decisions regarding risky tax avoidance practices. Furthermore, the results may signal the need for French policymakers to make more efforts to reduce risky tax avoidance activities that are harmful to investors. They must enforce the existence and the reporting of a tax risk management strategy by firms.

This study contributes to the growing body of literature on the tax avoidance effects with a special focus on firm risk. This study provides the first French evidence of the role of tax risk in the relationship between tax avoidance and firm risk.

This study aims to evaluate the adequacy of climate risk disclosure by providing empirical evidence on whether corporate disclosure meets rising stakeholders’ demand for risk disclosure concerning climate change.

Drawing on a triangulated approach for collecting data from multiple sources in a longitudinal study, we perform a panel regression analysis on a sample of multinational firms between 2007 and 2021. Inspired by the Global Reporting Initiative (GRI) principles, our innovative and inclusive model of measuring firm-level climate risks underscores the urgent need to redefine materiality from a broader value creation (rather than only financial) perspective, including the impact on sustainable development.

The findings of this study provide evidence of limited corporate climate risk disclosure, indicating that organisations have yet to accept the reality of climate-related risks. An additional finding supports the existence of a nexus between higher corporate environmental disclosure and higher corporate resilience to material financial and environmental risks, rather than pervasive sustainability risk disclosure.

We argue that a mechanical process for climate-related risk disclosure can limit related disclosure variability, risk reporting priority selection, thereby broadening the short-term perspective on financial materiality assessment for disclosure.

This study extends recent literature on the adequacy of corporate risk disclosure, highlighting the importance of disclosing material sustainability risks from the perspectives of different stakeholder groups for long-term success. Corporate management should place climate-related risks at the centre of their disclosure strategies. We argue that reducing the systematic underestimation of climate-related risks and variations in their disclosure practices may require regulations that enhance corporate perceptions and responses to these risks.

This study emphasises the importance of reconceptualising materiality from a multidimensional value creation standpoint, encapsulating financial and sustainable development considerations. This novel model of assessing firm-level climate risk, based on the GRI principles, underscores the necessity of developing a more comprehensive approach to evaluating materiality.

This paper provides a stakeholder-based rationale for firm risk reduction through diversification. While firm-specific investments from stakeholders are often important sources of firm competitive advantage and economic rents, there is a reduced incentive for stakeholders to make these investments due to the risk associated with firm-specific investments. Since the risk associated with firm-specific investments is often related to the total firm risk level, we argue that stakeholders’ difficulties in diversifying the risks associated with their firm-specific investments create incentives for risk management by firms. We test this argument in a diversification setting. Based on a sample of firms’ first acquisition moves, we find that firms are more likely to engage in risk reduction through diversification when high levels of firm-specific assets are important to the firm's operations. Several proxies for stakeholders’ specific investments are found to be significant in explaining cross-sectional variation in the extent of ex ante risk reduction in acquisitions.

Going back into previously exited markets is a significant management risk. But, how are re-entry risks managed? By adding strategic reference point (SRP) rationales to the risk management literature, this chapter examines re-entry after initial entry and divestment on a sample of 654 multinational enterprise (MNE) re-entrants. The authors move away from narrow risk management lenses according to which risks happen in isolation and theorize that MNEs simultaneously manage international risk by exploiting the trade-offs among external and internal sources of risk. The authors explain that, for re-entrants, exit may become the SRP for evaluating future strategic choices. The results suggest that re-entrants tend to manage re-entry risk by choosing partner-based modes that enable them to maintain strategic flexibility at re-entry. Surprisingly perhaps, market-specific experience acquired during the initial market foray does not provide strategic flexibility, in that highly experienced firms still experience risk trade-offs.

Purpose – The relation between research and development (R&D) expenditures and bondholder wealth is examined.

Methodology/approach – A sample of firms that increase R&D expenditures is partitioned into two subsamples: firms with high default risk versus firms with low default risk. For each subsample, we examine the effect of R&D increases on bond returns and default risks.

Findings – For firms with high default risk, R&D increases have a negative impact on bond returns and default risk. Further, there is a wealth transfer from bondholders to stockholders surrounding R&D increases. Neither of these results is found for firms with low default risk.

Research limitations/implications – The present study highlights the importance of assessing firm's existing default risk to understand the effects that R&D expenditures have on bondholders.

Social implications – The study reveals a potential social welfare and economic cost, as it reveals that stockholders may be able to gain wealth at the expense of bondholders.

Originality/value – The study provides important insights to bondholders on how firms’ investment policies, such as R&D expenditures, may affect their wealth.

In a largely exploratory study, the authors investigate: how do managers’ experiences with exogenous hazards (e.g., natural disaster risk) affect their identification of those hazards as salient to the firm? This analysis is based on an international survey of 575 managers across 18 disaster-prone countries. The authors examine whether and how locational hazard risk and managerial experience influence the identification of natural disaster risk as an important firm issue. The authors find that locational natural hazard risk, and direct and indirect experience with natural disasters, increases the likelihood that managers’ will identify firm-specific natural disaster risk as an important firm issue. In addition, the authors also find that managers are likely to identify natural hazards as a threat when natural hazard risk is high and when managers have experience in natural disasters that directly affected their businesses.