Showing papers by "Catherine M. Schrand published in 1999"
TL;DR: In this paper, the authors show that higher cash flow volatility is associated with lower average levels of investment in capital expenditures, R&D, and advertising, suggesting that firms do not use external capital markets to fully cover cash flow shortfalls but rather permanently forgo investment.
594 citations
TL;DR: In this article, the authors use an option pricing framework to model equity valuation when firms face costs associated with violating accounting-based debt covenants, and find that the value of equity depends on two factors: the economic value of the firm and the probability that the firm violates the covenant.
75 citations
TL;DR: In this article, the substitutability and complementarity of a variety of risk management strategies that firms can use to reduce price risk exposure is examined, showing that less profitable and more financially distressed firms are more likely to manage risk using derivatives.
Abstract: This paper examines the substitutability and complementarity of a variety of risk management strategies that firms can use to reduce price risk exposure. Time-series analysis over a period of significant regulatory changes indicates that natural gas companies increased diversification and started using derivatives as price risk increased following price deregulation and the regulated unbundling of sale and transmission activities. The use of derivatives is a substitute both for holding internal cash and for storing gas underground. The latter two activities are complements. In choosing between derivatives and storage or cash holdings, less profitable and more financially distressed firms are more likely to manage risk using derivatives. Accounting earnings management strategies, however, are not complements to activities that have a "real" effect on cash flow volatilityand diversification is not related to financial hedging activities. Market-based estimates of wellhead gas price sensitivities are negative prior to deregulation and become significantly positive following price deregulation. The change in exposure is consistent with the changing role of pipelines from buyers of gas for transport to only transporters of gas resulting from deregulation. Cross-sectional variation in price sensitivities is related to firms' use of combinations of operational (non-accounting) and financial hedging activities. Firms that pursue these activities have smaller and less variable risk-adjusted wellhead gas return exposures than firms that do not, especially post-deregulation.
38 citations