Non-financial Corporations and Systemic Risk

Source Image: Pexels - Karolina Grabowska
Thursday, December 9, 2021 - 11:15

Dr. Thomas Flavin and Dr. Thomas O’Connor, along with their co-authors Prof. Mardi Dungey (University of Tasmania)* and Dr. Michael Wosser (Central Bank of Ireland), have published a peer-reviewed article, entitled ‘Non-financial Corporations and Systemic Risk’, in the Journal of Corporate Finance.

Systemic risk refers to risk that spreads throughout the financial system, and has the potential to impair the functioning of financial markets. Until now, studies of systemic risk have focused on banks and other financial firms, with a particular focus on identifying ‘systemically-important institutions’, namely those that pose a threat to the wider system, either at a domestic or global level. This paper investigates if non-financial firms can also be ‘‘systemically-important’. Using a sample of 1145 non-financial U.S. corporations, the analysis confirms that these firms are both vulnerable to systemic shocks and contribute to system-wide risk, thus aggravating the risk within the financial system. The paper proceeds to identify a number of key firm characteristics that are associated with systemic risk. This finding is important for the banking industry who need to manage their exposure to firms who have the potential to propagate shocks across the financial system.

The paper can be downloaded (free until 21 January, 2022) here.
* Regrettably, this is a posthumous publication for Prof. Mardi Dungey who died in January 2019. We dedicate this paper to her memory and feel proud to have been associated with such an insightful, ground-breaking, and warm person. This paper represents another contribution to the enormous legacy that she leaves behind.