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On Risk Management Determinants: What Really Matters?

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  • Georges Dionne
  • Thouraya Triki

Abstract

We investigate the determinants of the risk management decision for an original dataset of North American gold mining firms. We propose explanations based on the firm's financial characteristics, managerial risk aversion and internal corporate governance mechanisms. We develop a theoretical model in which the debt and the hedging decisions are made simultaneously. Our model suggests that more hedging does not always lead to a higher debt capacity when the firm holds a standard debt contract, while hedging is an increasing function of the firm's financial distress costs. We then test the predictions of our model. To estimate our system of simultaneous Tobit equations, we extend, to panel data, the minimum distance estimator proposed by Lee (1995). We obtain that financial distress costs, information asymmetry, separation between the posts of CEO and chairman of the board positions and managerial risk aversion are important determinants of the decision to hedge whereas the composition of the board of directors has no impact in such decision. Also, our results do not support the conclusion that firms hedge in order to increase their debt capacity which seems to confirm our model's prediction.

Suggested Citation

  • Georges Dionne & Thouraya Triki, 2004. "On Risk Management Determinants: What Really Matters?," Cahiers de recherche 0417, CIRPEE.
  • Handle: RePEc:lvl:lacicr:0417
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    References listed on IDEAS

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    Cited by:

    1. Wissem Bouaziz & Abdelfettah Bouri, 2012. "Ownership structure and financial institutes risk taking: evidence from Tunisian quoted bank (financial institute)," International Journal of Managerial and Financial Accounting, Inderscience Enterprises Ltd, vol. 4(1), pages 47-60.
    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. Dionne, Georges & Santugini, Marc, 2014. "Entry, imperfect competition, and futures market for the input," International Journal of Industrial Organization, Elsevier, vol. 35(C), pages 70-83.
    4. J. Cummins & Georges Dionne & Robert Gagné & A. Nouira, 2009. "Efficiency of insurance firms with endogenous risk management and financial intermediation activities," Journal of Productivity Analysis, Springer, vol. 32(2), pages 145-159, October.
    5. Georges Dionne & Thouraya Triki, 2005. "Risk Management and Corporate Governance: the Importance of Independence and Financial Knowledge for the Board and the Audit Committee," Cahiers de recherche 0515, CIRPEE.
    6. Monda, Barbara & Giorgino, Marco & Modolin, Ileana, 2013. "Rationales for Corporate Risk Management - A Critical Literature Review," MPRA Paper 45420, University Library of Munich, Germany.
    7. Mohamed Mnasri & Georges Dionne & Jean-Pierre Gueyie, 2013. "The Maturity Structure of Corporate Hedging: the Case of the U.S. Oil and Gas Industry," Cahiers de recherche 1337, CIRPEE.
    8. Selim Mankaï & Aymen Belgacem, 2013. "Interactions Between Risk-Taking, Capital, and Reinsurance for Property-Liability Insurance Firms," EconomiX Working Papers 2013-23, University of Paris Nanterre, EconomiX.
    9. Dionne, Georges & Desjardins, Denise, 2017. "Reinsurance Demand and Liquidity Creation," Working Papers 17-3, HEC Montreal, Canada Research Chair in Risk Management.

    More about this item

    Keywords

    Risk management determinants; corporate hedging; capital structure; managerial risk aversion; gold price; tax incentive; minimum distance estimator; panel data; Tobit; corporate governance.;

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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