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Some Determinants of Corporate Risk Aversion

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  • J. Eric Bickel

    (Department of Industrial and Systems Engineering, Texas A&M University, 236B Zachry Engineering Center, 3131 TAMU, College Station, Texas 77843-3131)

Abstract

In this paper we roughly quantify the degree of risk aversion induced by three rationales for corporate risk management: the cost of financial distress, costly external finance, and the principal-agent relationship between shareholders and management. In so doing, we provide a foundation for the use of corporate utility functions. However, we are unable to fully support the degree of risk aversion reported in the decision analysis literature. Specifically, financial distress and costly external finance appear to induce relatively little risk aversion, while principal-agent concerns lend only partial support to published corporate risk tolerance guidelines.

Suggested Citation

  • J. Eric Bickel, 2006. "Some Determinants of Corporate Risk Aversion," Decision Analysis, INFORMS, vol. 3(4), pages 233-251, December.
    • Handle: RePEc:inm:ordeca:v:3:y:2006:i:4:p:233-251
    DOI: 10.1287/deca.1060.0080
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