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Rethinking Risk Management

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  • René M. Stulz

Abstract

This paper presents a theory of corporate risk management that attempts to go beyond the "variance-minimization" model that dominates most academic discussions of the subject. It argues that the primary goal of risk management is not to dampen swings in corporate cash flows or value, but rather to provide protection against the possibility of "costly lower-tail outcomes"-situations that would cause financial distress or make a company unable to carry out its investment strategy. (In the jargon of finance specialists, risk management can be viewed as the purchase of well-out-of-the-money put options designed to limit downside risk.) 1996 Morgan Stanley.

Suggested Citation

  • René M. Stulz, 1996. "Rethinking Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(3), pages 8-25.
  • Handle: RePEc:bla:jacrfn:v:9:y:1996:i:3:p:8-25
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