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Are exogenous requirements sufficient to induce corporate risk management activities?

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  • Ales Berk
  • Igor Loncarski

Abstract

This article reports the current practices of risk management in Slovenian companies and relates the incentives for risk management in the country's post-transitional legal and business environment to the neoclassical theoretical motives for risk management. We find that in such an environment, which more or less characterises most Eastern European countries, neoclassical theoretical motives do not provide sufficient (endogenous) incentives for shareholders and managers to manage risk within their firms. We argue that the compulsory use of International Financial Reporting Standard (IFRS) disclosure requirements induces managers to actively analyse and manage risks. We see this exogenous push as a necessary but unfortunately not a sufficient mechanism to induce managers to manage risk within their firms since managers perceive the reporting requirements primarily as cost-enhancing. We argue that, in order to endogenise the incentives, governments need to create market conditions in which managers will also see the added value of risk management. This will require predominantly a change in corporate governance mechanisms.

Suggested Citation

  • Ales Berk & Igor Loncarski, 2011. "Are exogenous requirements sufficient to induce corporate risk management activities?," Post-Communist Economies, Taylor & Francis Journals, vol. 23(1), pages 119-137.
  • Handle: RePEc:taf:pocoec:v:23:y:2011:i:1:p:119-137
    DOI: 10.1080/14631377.2011.546994
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