Risk Shifting or Risk Management: How do Firms Hedge in Financial Distress?
In this paper we address the question of how firms hedge in financial distress. Using hand-collected data from oil and gas producers, we show thatthe uniquecharacteristic of derivative portfolios in distressed firms is a strategythat involvessold put options. This is puzzling, considering that selling put options amounts to selling insurance, which creates a new liability that distressed firms seeIn this paper we address the question of how firms hedge in financial distress.Using hand-collected data from oil and gas producers, we show that the uniquecharacteristic of derivative portfolios in distressed firms is a strategy thatinvolves sold put options. This is puzzling, considering that selling put optionsamounts to selling insurance, which creates a new liability that distressed firmsseem