IDEAS home Printed from https://ideas.repec.org/a/bla/finmgt/v47y2018i4p783-832.html
   My bibliography  Save this article

The Theory and Practice of Corporate Risk Management: Evidence from the Field

Author

Listed:
  • Erasmo Giambona
  • John R. Graham
  • Campbell R. Harvey
  • Gordon M. Bodnar

Abstract

We survey more than 1,100 risk managers from around the world regarding their risk management policies. We find evidence consistent with some traditional theories of risk management, but not with all. We then study “why” or “why not” firms hedge and find that almost 90% of risk managers in nonfinancial firms hedge to increase expected cash flow. We also find that 70% to 80% of risk managers hedge to smooth earnings or to satisfy shareholders’ expectations. Our analysis also suggests that regulatory changes implemented to increase market stability (e.g., Dodd‐Frank Act) could discourage corporate hedging. Finally, we provide evidence regarding hedging in six areas of risk: interest rate, foreign exchange, commodity, energy, credit, and geopolitical. We find that operational hedging is more common than financial hedging in all risk areas except foreign exchange.

Suggested Citation

  • Erasmo Giambona & John R. Graham & Campbell R. Harvey & Gordon M. Bodnar, 2018. "The Theory and Practice of Corporate Risk Management: Evidence from the Field," Financial Management, Financial Management Association International, vol. 47(4), pages 783-832, December.
    • Handle: RePEc:bla:finmgt:v:47:y:2018:i:4:p:783-832
    DOI: 10.1111/fima.12232
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/fima.12232
    Download Restriction: no
    File URL: https://libkey.io/10.1111/fima.12232?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Erasmo Giambona & John R Graham & Campbell R Harvey, 2017. "The management of political risk," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 48(4), pages 523-533, May.
    2. Harrison Hong & Terence Lim & Jeremy C. Stein, 2000. "Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies," Journal of Finance, American Finance Association, vol. 55(1), pages 265-295, February.
    3. Bessembinder, Hendrik, 1991. "Forward Contracts and Firm Value: Investment Incentive and Contracting Effects," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(4), pages 519-532, December.
    4. Henk Berkman & Michael E. Bradbury, 1996. "Empirical Evidence on the Corporate Use of Derivatives," Financial Management, Financial Management Association, vol. 25(2), Summer.
    5. Rampini, Adriano A. & Viswanathan, S., 2013. "Collateral and capital structure," Journal of Financial Economics, Elsevier, vol. 109(2), pages 466-492.
    6. Mian, Shehzad L., 1996. "Evidence on Corporate Hedging Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(3), pages 419-439, September.
    7. Gordon M. Bodnar & Abe de Jong & Victor Macrae, 2003. "The Impact of Institutional Differences on Derivatives Usage: a Comparative Study of US and Dutch Firms," European Financial Management, European Financial Management Association, vol. 9(3), pages 271-297, September.
    8. Gerald D. Gay & Jouahn Nam, 1998. "The Underinvestment Problem and Corporate Derivatives Use," Financial Management, Financial Management Association, vol. 27(4), Winter.
    9. Mitchell A. Petersen & S. Ramu Thiagarajan, 2000. "Risk Measurement and Hedging: With and Without Derivatives," Financial Management, Financial Management Association, vol. 29(4), Winter.
    10. Chris Mallin & Kean Ow-Yong & Martin Reynolds, 2001. "Derivatives usage in UK non-financial listed companies," The European Journal of Finance, Taylor & Francis Journals, vol. 7(1), pages 63-91.
    11. Hentschel, Ludger & Kothari, S. P., 2001. "Are Corporations Reducing or Taking Risks with Derivatives?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(1), pages 93-118, March.
    12. François Degeorge & B. Moselle & R.J. Zeckhauser, 1996. "Hedging and Gambling: Corporate Risk Choice When Informing the Market," Working Papers hal-00606074, HAL.
    13. Antti Hakkarainen & Eero Kasanen & Vesa Puttonen, 1997. "Interest Rate Risk Management in Major Finnish Firms," European Financial Management, European Financial Management Association, vol. 3(3), pages 255-268, November.
    14. G. David Haushalter, 2000. "Financing Policy, Basis Risk, and Corporate Hedging: Evidence from Oil and Gas Producers," Journal of Finance, American Finance Association, vol. 55(1), pages 107-152, February.
    15. Henri Servaes & Ane Tamayo & Peter Tufano, 2009. "The Theory and Practice of Corporate Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 21(4), pages 60-78, September.
    16. Mello, Antonio S & Parsons, John E, 2000. "Hedging and Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 127-153.
    17. Murillo Campello & Chen Lin & Yue Ma & Hong Zou, 2011. "The Real and Financial Implications of Corporate Hedging," Journal of Finance, American Finance Association, vol. 66(5), pages 1615-1647, October.
    18. Walter Dolde, 1993. "The Trajectory Of Corporate Financial Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 6(3), pages 33-41, September.
    19. DeMarzo, Peter M. & Duffie, Darrell, 1991. "Corporate financial hedging with proprietary information," Journal of Economic Theory, Elsevier, vol. 53(2), pages 261-286, April.
    20. John R. Graham & Daniel A. Rogers, 2002. "Do Firms Hedge in Response to Tax Incentives?," Journal of Finance, American Finance Association, vol. 57(2), pages 815-839, April.
    21. DeMarzo, Peter M & Duffie, Darrell, 1995. "Corporate Incentives for Hedging and Hedge Accounting," The Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 743-771.
    22. Tufano, Peter, 1996. "Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry," Journal of Finance, American Finance Association, vol. 51(4), pages 1097-1137, September.
    23. Brennan, Michael J. & Subrahmanyam, Avanidhar, 1995. "Investment analysis and price formation in securities markets," Journal of Financial Economics, Elsevier, vol. 38(3), pages 361-381, July.
    24. Smith, Clifford W. & Stulz, René M., 1985. "The Determinants of Firms' Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(4), pages 391-405, December.
    25. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. "Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-1658, December.
    26. Zhang, Haiwen, 2009. "Effect of derivative accounting rules on corporate risk-management behavior," Journal of Accounting and Economics, Elsevier, vol. 47(3), pages 244-264, June.
    27. Guay, Wayne R., 1999. "The impact of derivatives on firm risk: An empirical examination of new derivative users1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 319-351, January.
    28. John R. Graham & Clifford W. Smith, 1999. "Tax Incentives to Hedge," Journal of Finance, American Finance Association, vol. 54(6), pages 2241-2262, December.
    29. Geczy, Christopher & Minton, Bernadette A & Schrand, Catherine, 1997. "Why Firms Use Currency Derivatives," Journal of Finance, American Finance Association, vol. 52(4), pages 1323-1354, September.
    30. Adriano A. Rampini & S. Viswanathan, 2010. "Collateral, Risk Management, and the Distribution of Debt Capacity," Journal of Finance, American Finance Association, vol. 65(6), pages 2293-2322, December.
    31. Nance, Deana R & Smith, Clifford W, Jr & Smithson, Charles W, 1993. "On the Determinants of Corporate Hedging," Journal of Finance, American Finance Association, vol. 48(1), pages 267-284, March.
    Full references (including those not matched with items on IDEAS)

    Citations

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


    Cited by:

    1. Andreas Hecht, 2021. "The role of managerial characteristics in FX risk management: Who increases risk?," Review of Managerial Science, Springer, vol. 15(8), pages 2377-2406, November.
    2. Pankaj K. Jain & Ayla Kayhan & Esen Onur, 2024. "Determinants of commodity market liquidity," The Financial Review, Eastern Finance Association, vol. 59(1), pages 9-30, February.
    3. Bashir, Taqadus & Khalid, Shujaat & Iqbal Khan, Kanwal & Javed, Saman, 2019. "Interest Rate Risk Management by Financial Engineering in Pakistani Non-Financial Firms," MPRA Paper 96426, University Library of Munich, Germany.
    4. Jiyeon Yun & James M. Carson & David L. Eckles, 2023. "Executive compensation and corporate risk management," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 90(2), pages 521-557, June.
    5. John R. Graham, 2022. "Presidential Address: Corporate Finance and Reality," Journal of Finance, American Finance Association, vol. 77(4), pages 1975-2049, August.
    6. Choi, Young Mok & Park, Kunsu & Kim, Woo Sung, 2020. "Corporate hedging and dividend policy: An empirical study of Korean firms," Finance Research Letters, Elsevier, vol. 32(C).
    7. Vicente García Averell & Calixto López Castañon & Gabriel Levin-Konigsberg & Hillary Stein, 2023. "Risk Management and Derivatives Losses," Working Papers 23-8, Federal Reserve Bank of Boston.
    8. Karca D. Aral & Erasmo Giambona & Ye Wang, 2022. "Buyer’s Bankruptcy Risk, Sourcing Strategy, and Firm Value: Evidence from the Supplier Protection Act," Management Science, INFORMS, vol. 68(11), pages 7940-7957, November.
    9. Chaudhry, Neeru & Gupta, Aastha, 2023. "Do derivatives benefit shareholders? Evidence from India," Finance Research Letters, Elsevier, vol. 55(PB).
    10. Biguri, Kizkitza & Brownlees, Christian & Ippolito, Filippo, 2022. "Corporate hedging and the variance of stock returns," Journal of Corporate Finance, Elsevier, vol. 72(C).
    11. Gunratan Lonare & Ahmet Nart & Ahmet M. Tuncez, 2022. "Industry tournament incentives and corporate hedging policies," Financial Management, Financial Management Association International, vol. 51(2), pages 399-453, June.
    12. Chongwu Xia & Chuyi Yang & Lei Zhang, 2021. "The real effect of foreign exchange hedging on corporate innovation," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(12), pages 2046-2078, December.
    13. Richard Friberg & Isak Trygg Kupersmidt, 2023. "Hedging to market‐wide shocks and competitive selection," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 32(2), pages 450-466, April.
    14. Jerome Geyer-Klingeberg & Markus Hang & Andreas Rathgeber, 2021. "Corporate financial hedging and firm value: a meta-analysis," The European Journal of Finance, Taylor & Francis Journals, vol. 27(6), pages 461-485, April.
    15. Jiaqi Jiang & Yun Feng, 2021. "The interaction of risk management tools: Financial hedging, corporate diversification and liquidity," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 2396-2413, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Monda, Barbara & Giorgino, Marco & Modolin, Ileana, 2013. "Rationales for Corporate Risk Management - A Critical Literature Review," MPRA Paper 45420, University Library of Munich, Germany.
    2. Gordon M. Bodnar & Erasmo Giambona & John R. Graham & Campbell R. Harvey, 2019. "A View Inside Corporate Risk Management," Management Science, INFORMS, vol. 65(11), pages 5001-5026, November.
    3. Bartram, Söhnke M., 2004. "The Use of Options in Corporate Risk Management," MPRA Paper 6663, University Library of Munich, Germany.
    4. Fauver, Larry & Naranjo, Andy, 2010. "Derivative usage and firm value: The influence of agency costs and monitoring problems," Journal of Corporate Finance, Elsevier, vol. 16(5), pages 719-735, December.
    5. Arnold, Matthias M. & Rathgeber, Andreas W. & Stöckl, Stefan, 2014. "Determinants of corporate hedging: A (statistical) meta-analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(4), pages 443-458.
    6. Mnasri, Mohamed & Dionne, Georges & Gueyie, Jean-Pierre, 2013. "How do firms hedge risks? Empirical evidence from U.S. oil and gas producers," Working Papers 13-3, HEC Montreal, Canada Research Chair in Risk Management.
    7. 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.
    8. John R. Graham & Daniel A. Rogers, 2002. "Do Firms Hedge in Response to Tax Incentives?," Journal of Finance, American Finance Association, vol. 57(2), pages 815-839, April.
    9. Carter, David A. & Rogers, Daniel A. & Simkins, Betty J. & Treanor, Stephen D., 2017. "A review of the literature on commodity risk management," Journal of Commodity Markets, Elsevier, vol. 8(C), pages 1-17.
    10. Hagelin, Niclas & Pramborg, Bengt, 2006. "Empirical evidence concerning incentives to hedge transaction and translation exposures," Journal of Multinational Financial Management, Elsevier, vol. 16(2), pages 142-159, April.
    11. Mohamed Mnasri & Georges Dionne & Jean-Pierre Gueyie, 2013. "The Maturity Structure of Corporate Hedging: the Case of the U.S. Oil and Gas Industry," Cahiers de recherche 1337, CIRPEE.
    12. Fabling, Richard & Grimes, Arthur, 2008. "Do Exporters Cut the Hedge? Who Hedges, When and Why?," Occasional Papers 08/2, Ministry of Economic Development, New Zealand.
    13. Oberoi, Jaideep, 2018. "Interest rate risk management and the mix of fixed and floating rate debt," Journal of Banking & Finance, Elsevier, vol. 86(C), pages 70-86.
    14. Huang, Pinghsun & Huang, Hsin-Yi & Zhang, Yan, 2019. "Do firms hedge with foreign currency derivatives for employees?," Journal of Financial Economics, Elsevier, vol. 133(2), pages 418-440.
    15. Lel, Ugur, 2012. "Currency hedging and corporate governance: A cross-country analysis," Journal of Corporate Finance, Elsevier, vol. 18(2), pages 221-237.
    16. Gunratan Lonare & Ahmet Nart & Ahmet M. Tuncez, 2022. "Industry tournament incentives and corporate hedging policies," Financial Management, Financial Management Association International, vol. 51(2), pages 399-453, June.
    17. Huang, Pinghsun & Kabir, M. Humayun & Zhang, Yan, 2017. "Does Corporate Derivative Use Reduce Stock Price Exposure? Evidence From UK Firms," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 128-136.
    18. Nelson, James M. & Moffitt, Jacquelyn Sue & Affleck-Graves, John, 2005. "The impact of hedging on the market value of equity," Journal of Corporate Finance, Elsevier, vol. 11(5), pages 851-881, October.
    19. Niclas Hagelin, 2003. "Why firms hedge with currency derivatives: an examination of transaction and translation exposure," Applied Financial Economics, Taylor & Francis Journals, vol. 13(1), pages 55-69.
    20. Bartram, Söhnke M. & Brown, Gregory W. & Conrad, Jennifer, 2011. "The Effects of Derivatives on Firm Risk and Value," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(4), pages 967-999, August.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:finmgt:v:47:y:2018:i:4:p:783-832. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/fmaaaea.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.