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Could Risk Management Be Harmful to Firms?

Author

Listed:
  • Rui Li

    (College of Management, University of Massachusetts)

Abstract

Based on a theoretical model, this paper shows that risk management policies shielding firms from marketwide risk exposures could be harmful to the firms. Specifically, if a firm's operation is delegated to a manager and subject to moral hazard problems, risk exposures could align the manager's interests with the firm owner's so that they alleviate the moral hazard problems and raise the firm's value. As a result, the risk management policies could reduce the firm's value to the owner.

Suggested Citation

  • Rui Li, 2018. "Could Risk Management Be Harmful to Firms?," Annals of Economics and Finance, Society for AEF, vol. 19(1), pages 247-263, May.
    • Handle: RePEc:cuf:journl:y:2018:v:19:i:1:li
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    risk management; dynamic contracts; moral hazard;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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