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Alleviating Coordination Problems and Regulatory Constraints through Financial Risk Management

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  • Marcel Boyer
  • M. Martin Boyer
  • René Garcia

Abstract

We characterize a firm as a nexus of activities and projects with their associated cash flow distributions across states of the world and time periods. We propose a characterization of the firm where variations in the market price of risk induce adjustments in the value-maximizing combination of projects. Changing the portfolio of projects generates coordination costs. We propose a new role for financial risk management based on the idea that the use of financial derivatives may reduce coordination costs. We find empirical support for this new rationale for the use of financial derivatives, after controlling for the traditional variables explaining the need for financial risk management. Nous caractérisons une entreprise comme un ensemble d'activités et de projets avec leurs flux financiers par état et période. Nous proposons une caractérisation de l'entreprise où les variations dans le prix de marché du risque induisent des ajustements dans la combinaison optimale d'activités ou de projets. Les modifications du portefeuille de projets génèrent des coûts de coordination. Nous proposons un nouveau rôle pour la gestion financière des risques en proposant que l'utilisation de titres financiers puisse réduire les coûts de coordination. Ce nouveau rôle de la gestion financière des risques est vérifié empiriquement, une fois pris en compte les facteurs explicatifs traditionnels de la gestion financière des risques.

Suggested Citation

  • Marcel Boyer & M. Martin Boyer & René Garcia, 2011. "Alleviating Coordination Problems and Regulatory Constraints through Financial Risk Management," CIRANO Working Papers 2011s-48, CIRANO.
  • Handle: RePEc:cir:cirwor:2011s-48
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    Keywords

    Risk Management; firm value; coordination problems; hedging; value at risk.; Gestion des risques; valeur d'entreprise; problèmes de coordination; hedging; valeur à risque.;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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