Advanced Search
MyIDEAS: Login to save this article or follow this journal

Corporate Risk Management and the Incentive Effects of Debt

Contents:

Author Info

  • Campbell, Tim S
  • Kracaw, William A
Registered author(s):

    Abstract

    This paper demonstrates how the incentive of manager-equityholders to substitute toward riskier assets, commonly referred to as the "asset substitution problem," is related to the level of observable risk in the firm. When observable and unobservable risks are sufficiently positively correlated, increases (decreases) in observable risk generate the incentive for manager-equityholders to increase (decrease) unobservable risk. Thus, credible commitments to hedge observable risk can benefit the firm's manager-equityholders by reducing the incentive to shift risk and the associated agency cost of debt. This provides a positive rationale for hedging diversifiable risk at the firm level. Copyright 1990 by American Finance Association.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://links.jstor.org/sici?sici=0022-1082%28199012%2945%3A5%3C1673%3ACRMATI%3E2.0.CO%3B2-Z&origin=repec
    File Function: full text
    Download Restriction: Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by American Finance Association in its journal Journal of Finance.

    Volume (Year): 45 (1990)
    Issue (Month): 5 (December)
    Pages: 1673-86

    as in new window
    Handle: RePEc:bla:jfinan:v:45:y:1990:i:5:p:1673-86

    Contact details of provider:
    Web page: http://www.afajof.org/
    More information through EDIRC

    Order Information:
    Web: http://www.afajof.org/membership/join.asp

    Related research

    Keywords:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Catherine M. Schrand & Haluk Unal, 1995. "Hedging and Coordinated Risk Management: Evidence from Thrift Conversions," Center for Financial Institutions Working Papers 96-05, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. George Benston & Jocelyn Evan, 2006. "Performance compensation contracts and CEOs’ incentive to shift risk to debtholders: An empirical analysis," Journal of Economics and Finance, Springer, vol. 30(1), pages 70-92, March.
    3. Cornaggia, Jess, 2013. "Does risk management matter? Evidence from the U.S. agricultural industry," Journal of Financial Economics, Elsevier, vol. 109(2), pages 419-440.
    4. Giorgio Stefano Bertinetti & Elisa Cavezzali & Gloria Gardenal, 2013. "The effect of the enterprise risk management implementation on the firm value of European companies," Working Papers 10, Department of Management, Università Ca' Foscari Venezia.
    5. Daniel Aunon-Nerin & Paul Ehling, 2007. "Why Firms Purchase Property Insurance?," Swiss Finance Institute Research Paper Series 07-16, Swiss Finance Institute.
    6. Kevin Aretz & Söhnke M. Bartram, 2010. "Corporate Hedging And Shareholder Value," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 33(4), pages 317-371, December.
    7. Monda, Barbara & Giorgino, Marco & Modolin, Ileana, 2013. "Rationales for Corporate Risk Management - A Critical Literature Review," MPRA Paper 45420, University Library of Munich, Germany.
    8. Brown, Gregory W., 2001. "Managing foreign exchange risk with derivatives," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 401-448, May.
    9. Zhao, Longkai, 2004. "Corporate risk management and asymmetric information," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(5), pages 727-750, December.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:bla:jfinan:v:45:y:1990:i:5:p:1673-86. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.