Investment risk
Investment risk

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Investment risk

3.6 Event risk

This is not unlike default risk but it is a special case meriting its own category. The shareholders or management of a company might consciously and voluntarily enter into a major transaction that radically changes either the company's nature or its capital structure (that is, the balance and mix of shares and various types of debt in its overall sources of finance). Such a restructuring might cause some or all investors to suffer a significant increase in the uncertainty of their investment returns. One common example of such an event is a management buyout (MBO), which frequently results in the replacement of a portion of the equity capital with debt and causes a corresponding increase in the financial risks to investors. In practice, more sophisticated investors seek to protect themselves in advance against event risk by incorporating suitable covenants into their original contracts with the company.


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