IDEAS home Printed from https://ideas.repec.org/a/tei/journl/v1y2008i1p71-99.html
   My bibliography  Save this article

A Review of the Rationales for Corporate Risk Management: Fashion or the Need?

Author

Listed:
  • Danijela Miloš Sprčić

    (Faculty of Business and Economics University of Zagreb)

  • Metka Tekavčič

    (Faculty of Economics University of Ljubljana)

  • Željko Šević

    (University of Greenwich Business School, London)

Abstract

This paper presents the extensive literature survey based both on theoretical rationales for hedging as well as the empirical evidence that support the implications of the theory regarding the arguments for the corporate risk management relevance and its influence on the company’s value. The survey of literature presented in this paper has revealed that there are two chief classes of rationales for corporate decision to hedge - maximisation of shareholder value or maximisation of managers’ private utility. The paper concludes that, the total benefit of hedging is the combination of all these motives and, if the costs of using corporate risk management instruments are less than the benefits provided via the avenues mentioned in this paper, or any other benefit perceived by the market, then risk management is a shareholder-value enhancing activity

Suggested Citation

  • Danijela Miloš Sprčić & Metka Tekavčič & Željko Šević, 2008. "A Review of the Rationales for Corporate Risk Management: Fashion or the Need?," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 1(1), pages 71-99, April.
    • Handle: RePEc:tei:journl:v:1:y:2008:i:1:p:71-99
    as

    Download full text from publisher

    File URL: http://ijbesar.teiemt.gr/docs/volume1_issue1/corporate_risk_management.pdf
    Download Restriction: no
    File URL: http://ijbesar.teiemt.gr/volume1_issue1.php
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. 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.
    2. Graham, J.R. & Smith, Jr.C.W., 1996. "The Incentives to Hedge," Papers 96-03, Rochester, Business - Financial Research and Policy Studies.
    3. Vojislav Maksimovic, 1988. "Capital Structure in Repeated Oligopolies," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 389-407, Autumn.
    4. 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.
    5. Yakov Amihud & Baruch Lev, 1981. "Risk Reduction as a Managerial Motive for Conglomerate Mergers," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 605-617, Autumn.
    6. Gerald D. Gay & Jouahn Nam, 1998. "The Underinvestment Problem and Corporate Derivatives Use," Financial Management, Financial Management Association, vol. 27(4), Winter.
    7. MacMinn, Richard D, 1987. "Forward Markets, Stock Markets, and the Theory of the Firm," Journal of Finance, American Finance Association, vol. 42(5), pages 1167-1185, December.
    8. Bartram, S.M., 2000. "Corporate Risk Management as a Lever for Shareholder Value Creation," Papers 00-58, Southern California - School of Business Administration.
    9. Campbell, Tim S. & Kracaw, William A., 1987. "Optimal Managerial Incentive Contracts and the Value of Corporate Insurance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(3), pages 315-328, September.
    10. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    11. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1991. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(1), pages 33-60.
    12. Lamont, Owen, 1997. "Cash Flow and Investment: Evidence from Internal Capital Markets," Journal of Finance, American Finance Association, vol. 52(1), pages 83-109, March.
    13. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    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. John Lintner, 1965. "Security Prices, Risk, And Maximal Gains From Diversification," Journal of Finance, American Finance Association, vol. 20(4), pages 587-615, December.
    16. Mello, Antonio S & Parsons, John E, 2000. "Hedging and Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 127-153.
    17. Allayannis, George & Weston, James P, 2001. "The Use of Foreign Currency Derivatives and Firm Market Value," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 243-276.
    18. Donald R. Lessard, 1991. "GLOBAL COMPETITION AND CORPORATE FINANCE IN THE 1990s," Journal of Applied Corporate Finance, Morgan Stanley, vol. 3(4), pages 59-72, January.
    19. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    20. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    21. DeMarzo, Peter M & Duffie, Darrell, 1995. "Corporate Incentives for Hedging and Hedge Accounting," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 743-771.
    22. May, Don O, 1995. "Do Managerial Motives Influence Firm Risk Reduction Strategies?," Journal of Finance, American Finance Association, vol. 50(4), pages 1291-1308, September.
    23. Gurel, Eitan & Pyle, David, 1984. "Bank Income Taxes and Interest Rate Risk Management: A Note," Journal of Finance, American Finance Association, vol. 39(4), pages 1199-1206, September.
    24. Myers, Stewart C, 1984. "The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    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. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
    27. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    28. 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.
    29. Allayannis, George & Ofek, Eli, 2001. "Exchange rate exposure, hedging, and the use of foreign currency derivatives," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 273-296, April.
    30. Mayers, David & Smith, Clifford W, Jr, 1982. "On the Corporate Demand for Insurance," The Journal of Business, University of Chicago Press, vol. 55(2), pages 281-296, April.
    31. Haushalter, G. David & Heron, Randall A. & Lie, Erik, 2002. "Price uncertainty and corporate value," Journal of Corporate Finance, Elsevier, vol. 8(3), pages 271-286, July.
    32. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 169-215.
    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. Simeon Karafolas, 2013. "Public financial support to investments in rural areas: The case of the region of Thessaly in Greece," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 6(2), pages 81-101, September.
    2. Henok Kifle, 2017. "The Impact of Regulation on Corporate Hedging Activities and the Response of Corporates ¨C A Preliminary Conceptual Framework," Business and Management Research, Business and Management Research, Sciedu Press, vol. 6(4), pages 1-15, December.
    3. 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.

    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. 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.
    3. Danijela Milos Sprcic, 2013. "Corporate Risk Management And Value Creation," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 9(2), pages 17-26.
    4. Söhnke M. Bartram & Gregory W. Brown & Frank R. Fehle, 2009. "International Evidence on Financial Derivatives Usage," Financial Management, Financial Management Association International, vol. 38(1), pages 185-206, March.
    5. Lin, Chen-Miao & Phillips, Richard D. & Smith, Stephen D., 2008. "Hedging, financing, and investment decisions: Theory and empirical tests," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1566-1582, August.
    6. Ibañéz, Francisco & Romero-Meza, Rafael & Coronado-Ramírez, Semei & Venegas-Martínez, Francisco, 2016. "Innovaciones financieras en América Latina:Mercado de Derivados y Determinates de la Administración de Riesgo," Panorama Económico, Escuela Superior de Economía, Instituto Politécnico Nacional, vol. 0(22), pages 7-38, Primer se.
    7. Doukas, John A. & Mandal, Sonik, 2018. "CEO risk preferences and hedging decisions: A multiyear analysis," Journal of International Money and Finance, Elsevier, vol. 86(C), pages 131-153.
    8. 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.
    9. Oliver Russ & Günther Gebhardt, 2005. "Erklärungsfaktoren für den Einsatz von Währungsderivaten bei deutschen Unternehmen — eine empirische Logit-Analyse," Schmalenbach Journal of Business Research, Springer, vol. 57(7), pages 565-594, November.
    10. Chen-Miao Lin & Stephen D. Smith, 2005. "Hedging, financing, and investment decisions: a simultaneous equations framework," FRB Atlanta Working Paper 2005-05, Federal Reserve Bank of Atlanta.
    11. Ammon, Norbert, 1998. "Why Hedge? - A Critical Review of Theory and Empirical Evidence -," ZEW Discussion Papers 98-18, ZEW - Leibniz Centre for European Economic Research.
    12. Bartram, Söhnke M., 2004. "The Use of Options in Corporate Risk Management," MPRA Paper 6663, University Library of Munich, Germany.
    13. 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.
    14. Deshmukh, Sanjay & Vogt, Stephen C., 2005. "Investment, cash flow, and corporate hedging," Journal of Corporate Finance, Elsevier, vol. 11(4), pages 628-644, September.
    15. Stein, Jeremy C., 2003. "Agency, information and corporate investment," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 2, pages 111-165, Elsevier.
    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. Andreas Röthig, 2009. "Microeconomic Risk Management and Macroeconomic Stability," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-642-01565-6, December.
    18. B. Charumathi & Hima Bindu Kota, 2012. "On the Determinants of Derivative Usage by Large Indian Non-financial Firms," Global Business Review, International Management Institute, vol. 13(2), pages 251-267, June.
    19. Frederic Loss, 2012. "Optimal Hedging Strategies and Interactions between Firms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(1), pages 79-129, March.
    20. Bartram, Söhnke M., 2019. "Corporate hedging and speculation with derivatives," Journal of Corporate Finance, Elsevier, vol. 57(C), pages 9-34.

    More about this item

    Keywords

    Risk Management; Transitional Economies; Perception and Management of Risk; Empirical Surveys;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions

    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:tei:journl:v:1:y:2008:i:1:p:71-99. 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: Kostas Stergidis (email available below). General contact details of provider: https://edirc.repec.org/data/dbikagr.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.