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The Effects of Imminent Bankruptcy on Stockholder Risk Preferences and Behavior

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  • Devra L. Golbe

Abstract

The conditions derived by Bulow and Shoven concerning the circumstances under which a firm goes bankrupt, can be used to draw inferences about stockholders risk preferences. Bankruptcy becomes less likely, the higher the expected value of the firm as a going concern and, in some interesting cases, the higher the variance of profits. Because stockholders' returns are truncated from below, mean-preserving increases in the variance of firm returns increase only the expected value of stockholders' returns and not their risk. Thus, although equity holders may be risk neutral or risk averse with respect to their own returns, they may be risk preferring with regard to firm returns.

Suggested Citation

  • Devra L. Golbe, 1981. "The Effects of Imminent Bankruptcy on Stockholder Risk Preferences and Behavior," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 321-328, Spring.
    • Handle: RePEc:rje:bellje:v:12:y:1981:i:spring:p:321-328
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    Cited by:

    1. Richardson, Grant & Lanis, Roman & Taylor, Grantley, 2015. "Financial distress, outside directors and corporate tax aggressiveness spanning the global financial crisis: An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 52(C), pages 112-129.
    2. Devra L. Golbe & Bernard Shull, 1991. "Risk Taking By Thrift Institutions: A Framework For Empirical Investigation," Contemporary Economic Policy, Western Economic Association International, vol. 9(3), pages 106-115, July.
    3. Lawrence J. White, 1990. "Problems Of The Fslic: A Former Policy Maker'S View," Contemporary Economic Policy, Western Economic Association International, vol. 8(2), pages 62-81, April.

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