Corporate Risk Management and the Incentive Effects of Debt
This paper demonstrates how the incentive of manager-equityholders to substitute toward riskier assets, commonly referred to as the "asset substitution problem," is related to the level of observable risk in the firm. When observable and unobservable risks are sufficiently positively correlated, increases (decreases) in observable risk generate the incentive for manager-equityholders to increase (decrease) unobservable risk. Thus, credible commitments to hedge observable risk can benefit the firm's manager-equityholders by reducing the incentive to shift risk and the associated agency cost of debt. This provides a positive rationale for hedging diversifiable risk at the firm level. Copyright 1990 by American Finance Association.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 45 (1990)
Issue (Month): 5 (December)
|Contact details of provider:|| Web page: http://www.afajof.org/|
More information through EDIRC
|Order Information:||Web: http://www.afajof.org/membership/join.asp|