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The Importance of Financial Leverage and Risk Aversion in Risk-Management Strategy Selection

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  • Brent A. Gloy
  • Timothy G. Baker

Abstract

The problem of choice among risk-management strategies is addressed with the stochastic dominance with a risk-free asset (SDRA) criteria. The SDRA criteria consider all possible combinations of the strategies and financial leverage. This allows for strategies with less business risk, less expected return, and greater leverage to dominate strategies with greater business risk and greater expected return. Results show that the inclusion of the risk-free asset significantly improves the discriminatory power of the ordinary stochastic dominance criteria for the case of risk-management strategies. Copyright 2002, Oxford University Press.

Suggested Citation

  • Brent A. Gloy & Timothy G. Baker, 2002. "The Importance of Financial Leverage and Risk Aversion in Risk-Management Strategy Selection," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(4), pages 1130-1143.
    • Handle: RePEc:oup:ajagec:v:84:y:2002:i:4:p:1130-1143
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    File URL: http://hdl.handle.net/10.1111/1467-8276.00373
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    Cited by:

    1. Jeffrey Harrison & Matthew Hart & Derek Oler, 2014. "Leverage and acquisition performance," Review of Quantitative Finance and Accounting, Springer, vol. 43(3), pages 571-603, October.
    2. Makus, Larry D. & Wang, H. Holly & Chen, Xiaomei, 2003. "Evaluating Risk Management Strategies For Non-Irrigated Small Grain Producers," 2003 Annual meeting, July 27-30, Montreal, Canada 22257, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    3. De Salvo, Maria & Capitello, Roberta & Gaudenzi, Barbara & Begalli, Diego, 2019. "Risk management strategies and residual risk perception in the wine industry: A spatial analysis in Northeast Italy," Land Use Policy, Elsevier, vol. 83(C), pages 47-62.
    4. Hailu, Getu & Jeffrey, Scott R. & Goddard, Ellen W., 2004. "Impact Of Decision Makers Divergence In Risk Attitudes And Perceptions On Co-Operative Management In Canada," 2004 Annual meeting, August 1-4, Denver, CO 20246, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Pinochet-Chateau, Rene & Shadbolt, Nicola M. & Holmes, Colin & Lopez-Villalobos, Nicolas, 2005. "Drivers of Risk in New Zealand Dairy Systems," 15th Congress, Campinas SP, Brazil, August 14-19, 2005 24289, International Farm Management Association.
    6. de Matías Batalla, David, 2016. "The new paradigm of international production: Empirical evidence of Spanish offshoring activities," Economics Discussion Papers 2016-37, Kiel Institute for the World Economy (IfW Kiel).
    7. Anindita Chakravarty & Rajdeep Grewal, 2011. "The Stock Market in the Driver's Seat! Implications for R&D and Marketing," Management Science, INFORMS, vol. 57(9), pages 1594-1609, March.

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