Risk exposure and financial policy

Abstract

PurposeThis paper aims to evaluate the effect of risk on the financial policy of emerging market firms.Design/methodology/approachUsing data from 34 emerging markets during a 17‐year period, 1990‐2006, a panel data model is employed for the analysis.FindingsThe results of this study indicate that firms with high probability of survival are likely to employ more debt. The level of risk exposure, particularly business risk is important in influencing the financial decisions of firms in emerging market economies. It is argued that since the use of debt increases firms' exposure to financial risk, firms with high business risk would shy away from using more debt. Also, finance providers in the financial market may not be interested in lending to firms with high business risk. This study also identified profitability, dividend, asset tangibility, growth opportunities, and GDP per capita as important determinants of the financial policy of emerging market firms.Originality/valueThis study contributes to the extant literature by providing empirical evidence regarding the effect of risk on the financial policy of emerging market firms.