Do Nonfinancial Firms Use Financial Assets to Take Risk?

This article investigates how financially distressed oil and gas firms increased their risk-taking by reallocating cash holdings into risky financial assets during the 2014 oil price crisis. Using hand-collected data and exploiting the oil price shock as an exogenous cash flow disturbance, the study finds that firms with high debt rollover risk—proxied by a large ratio of short-term liabilities to total liabilities—significantly increased investments in risky financial assets such as corporate debt, equity, and mortgage-backed securities. This risk-taking behavior is more pronounced in firms with low collateral and without derivative hedging, and is linked to agency conflicts between equity holders and creditors, particularly in firms with low dual holdings (simultaneous institutional ownership of debt and equity). The findings suggest that distressed firms use financial assets, often reported as cash holdings, to camouflage risk-taking, which carries implications for corporate governance, disclosure standards, and monitoring of nonfinancial firms' financial investments.