1. 1 Comments on Empirical Evidence of Risk Shifting Behavior in Large and Small Distressed Firms Yehning Chen National Taiwan University

2. 2 Main Contributions An extension of Eisdorfer (2008) - Eisdorfer (2008): For distressed firms, Volatility↑ → Gains from risk-taking↑→ Investment↑ This effect is more significant when volatility is higher - Contribution 1: the above effects are significant only for small firms because their agency problems are more serious - Contributions 2: for measuring asset return and volatility, use Duan (1994, 2000) rather than Merton (1974)

3. 3 Comments Very interesting idea: size (market capitalization) matters! Empirical results support the idea. Dependent: investment Dependent: ΔVolatility

4. 4 Comments Why does size matter? A puzzle! - Is the risk-shifting problem more serious for small firms? Not necessarily. (complexity, bargaining power, …) Size is rarely used as a proxy for agency problems (Smaller → Adverse selection↑→ Risk shifting↑? ) - Wild guess: size may be related to financial distress Given the same z-score: Larger firms → less likely to fail → less distressed → less likely to suffer risk-shifting

5. 5 Comments Using Duan (1994, 2000) to calculate asset return and volatility - Plus: More rigorous conceptually - Minus: Results less comparable to Eisdorfer (2008) - How significant are the improvements? If claim the improvements are important → Need to show what differences it makes

6. 6 Comments Some minor points - Style: too similar to Eisdorfer (2008) in format (tables, variables used, hypotheses, paragraphs…) - Results in Table 7 (Cost of risk-shifting) are not significant Impact of investment on debt value is insignificant For small distressed firms, the overinvestment problem reduces value of debt only by 0.97%

7. 7 Comments Some minor points - Results against the intuitions (1) z-score↑→ risk-shifting↓→ marginal return of investment↑ Table 3 finds the opposite results (for large firms) (2) Secured debt↑, convertible debt↑, or regulated industry → Risk-shifting problem should be less serious. Table 5 finds the opposite results