On Risk Management Determinants: What Really Matters?
AbstractWe investigate the determinants of the risk management decision for an original dataset of North American gold mining firms. We propose explanations based on the firm's financial characteristics, managerial risk aversion and internal corporate governance mechanisms. We develop a theoretical model in which the debt and the hedging decisions are made simultaneously. Our model suggests that more hedging does not always lead to a higher debt capacity when the firm holds a standard debt contract, while hedging is an increasing function of the firm's financial distress costs. We then test the predictions of our model. To estimate our system of simultaneous Tobit equations, we extend, to panel data, the minimum distance estimator proposed by Lee (1995). We obtain that financial distress costs, information asymmetry, separation between the posts of CEO and chairman of the board positions and managerial risk aversion are important determinants of the decision to hedge whereas the composition of the board of directors has no impact in such decision. Also, our results do not support the conclusion that firms hedge in order to increase their debt capacity which seems to confirm our model's prediction.
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Bibliographic InfoPaper provided by CIRPEE in its series Cahiers de recherche with number 0417.
Date of creation: 2004
Date of revision:
Risk management determinants; corporate hedging; capital structure; managerial risk aversion; gold price; tax incentive; minimum distance estimator; panel data; Tobit; corporate governance.;
Other versions of this item:
- Georges Dionne & Thouraya Triki, 2013. "On risk management determinants: what really matters?," The European Journal of Finance, Taylor & Francis Journals, vol. 19(2), pages 145-164, February.
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
- NEP-ACC-2004-08-16 (Accounting & Auditing)
- NEP-ALL-2004-08-16 (All new papers)
- NEP-CFN-2004-08-16 (Corporate Finance)
- NEP-RMG-2004-08-16 (Risk Management)
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