IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Rationales for Corporate Risk Management - A Critical Literature Review

  • Monda, Barbara
  • Giorgino, Marco
  • Modolin, Ileana

This paper describes theoretical motivations for corporate risk management activities and empirical evidence provided by different scholars on such rationales. These theoretical considerations can be extended also to the new risk management practices such as enterprise risk management. Based on modern financial theory’s assumption that markets are perfectly efficient, organizations should not implement risk management practices since they cannot contribute to add firm value. However, in the presence of market imperfections, risk management, stabilizing firm’s earnings, can benefit companies in the following manners: reducing transaction costs especially the expected costs of bankruptcy, lowering corporate taxes, aligning financing and investment policies and reducing costs associated with agency problems and asymmetric information.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: https://mpra.ub.uni-muenchen.de/45420/1/MPRA_paper_45420.pdf
File Function: original version
Download Restriction: no

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 45420.

as
in new window

Length:
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:pra:mprapa:45420
Contact details of provider: Postal:
Ludwigstraße 33, D-80539 Munich, Germany

Phone: +49-(0)89-2180-2459
Fax: +49-(0)89-2180-992459
Web page: https://mpra.ub.uni-muenchen.de

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
  2. David J. Denis & Diane K. Denis & Atulya Sarin, 1997. "Managerial Incentives And Corporate Diversification Strategies," Journal of Applied Corporate Finance, Morgan Stanley, vol. 10(2), pages 72-80.
  3. 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 1629-58, December.
  4. Bessembinder, Hendrik, 1991. "Forward Contracts and Firm Value: Investment Incentive and Contracting Effects," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(04), pages 519-532, December.
  5. Shawn D. Howton & Steven B. Perfect, 1998. "Currency and Interest-Rate Derivatives Use in US Firms," Financial Management, Financial Management Association, vol. 27(4), Winter.
  6. Smith, C.W. & Watts, R.L., 1992. "The Investment Oppotunity set and Corporate Financing, Dividend and Compensation Policies," Papers 92-02, Rochester, Business - Financial Research and Policy Studies.
  7. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  8. 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(03), pages 315-328, September.
  9. Larry D. Wall & John J. Pringle, 1987. "Alternate explanations of interest rate swaps," Proceedings 154, Federal Reserve Bank of Chicago.
  10. Bartram, Sohnke M. & Brown, Gregory W. & Hund, John E., 2007. "Estimating systemic risk in the international financial system," Journal of Financial Economics, Elsevier, vol. 86(3), pages 835-869, December.
  11. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
  12. David A. Carter & Daniel A. Rogers & Betty J. Simkins, 2006. "Does Hedging Affect Firm Value? Evidence from the US Airline Industry," Financial Management, Financial Management Association International, vol. 35(1), pages 53-86, 03.
  13. Christopher L. Culp & Merton H. Miller, 1995. "Metallgesellschaft And The Economics Of Synthetic Storage," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(4), pages 62-76.
  14. Mayers, David & Smith, Clifford W, Jr, 1990. "On the Corporate Demand for Insurance: Evidence from the Reinsurance Market," The Journal of Business, University of Chicago Press, vol. 63(1), pages 19-40, January.
  15. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  16. Jennifer N. Carpenter, 2000. "Does Option Compensation Increase Managerial Risk Appetite?," Journal of Finance, American Finance Association, vol. 55(5), pages 2311-2331, October.
  17. Brennan, Michael J & Schwartz, Edwardo S, 1978. "Corporate Income Taxes, Valuation, and the Problem of Optimal Capital Structure," The Journal of Business, University of Chicago Press, vol. 51(1), pages 103-14, January.
  18. Berger, Philip G. & Ofek, Eli, 1995. "Diversification's effect on firm value," Journal of Financial Economics, Elsevier, vol. 37(1), pages 39-65, January.
  19. Nance, Deana R & Smith, Clifford W, Jr & Smithson, Charles W, 1993. " On the Determinants of Corporate Hedging," Journal of Finance, American Finance Association, vol. 48(1), pages 267-84, March.
  20. Walter Dolde, 1993. "The Trajectory Of Corporate Financial Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 6(3), pages 33-41.
  21. Rogers, Daniel A., 2002. "Does executive portfolio structure affect risk management? CEO risk-taking incentives and corporate derivatives usage," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 271-295, March.
  22. 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.
  23. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  24. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1991. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups," The Quarterly Journal of Economics, Oxford University Press, vol. 106(1), pages 33-60.
  25. Ljungqvist Lars, 1994. "Asymmetric Information: A Rationale for Corporate Speculation," Journal of Financial Intermediation, Elsevier, vol. 3(2), pages 188-203, March.
  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. MacKie-Mason, Jeffrey K, 1990. " Do Taxes Affect Corporate Financing Decisions?," Journal of Finance, American Finance Association, vol. 45(5), pages 1471-93, December.
  28. Nevins D. Baxter, 1967. "Leverage, Risk Of Ruin And The Cost Of Capital," Journal of Finance, American Finance Association, vol. 22(3), pages 395-403, 09.
  29. 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, 02.
  30. Georges Dionne & Thouraya Triki, 2013. "On risk management determinants: what really matters?," The European Journal of Finance, Taylor & Francis Journals, vol. 19(2), pages 145-164, February.
  31. 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.
  32. Allayannis, George & Mozumdar, Abon, 2004. "The impact of negative cash flow and influential observations on investment-cash flow sensitivity estimates," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 901-930, May.
  33. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
  34. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  35. Maria Vassalou & Yuhang Xing, 2004. "Default Risk in Equity Returns," Journal of Finance, American Finance Association, vol. 59(2), pages 831-868, 04.
  36. Fok, Robert C. W. & Carroll, Carolyn & Chiou, Ming C., 1997. "Determinants of corporate hedging and derivatives: A revisit," Journal of Economics and Business, Elsevier, vol. 49(6), pages 569-585.
  37. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March.
  38. Isabelle Huault & V. Perret & S. Charreire-Petit, 2007. "Management," Post-Print halshs-00337676, HAL.
  39. Smith, Clifford W. & Stulz, René M., 1985. "The Determinants of Firms' Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 391-405, December.
  40. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
  41. Chidambaran, N. K. & Fernando, Chitru S. & Spindt, Paul A., 2001. "Credit enhancement through financial engineering: Freeport McMoRan's gold-denominated depositary shares," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 487-528, May.
  42. John D. Knopf & Jouahn Nam & John H. Thornton Jr., 2002. "The Volatility and Price Sensitivities of Managerial Stock Option Portfolios and Corporate Hedging," Journal of Finance, American Finance Association, vol. 57(2), pages 801-813, 04.
  43. John R. Graham & Clifford W. Smith, 1999. "Tax Incentives to Hedge," Journal of Finance, American Finance Association, vol. 54(6), pages 2241-2262, December.
  44. Asquith, Paul & Mullins, David Jr., 1986. "Equity issues and offering dilution," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 61-89.
  45. Campbell, Tim S & Kracaw, William A, 1990. " Corporate Risk Management and the Incentive Effects of Debt," Journal of Finance, American Finance Association, vol. 45(5), pages 1673-86, December.
  46. Antonio S. Mello & John E. Parsons, 1999. "Strategic Hedging," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(3), pages 43-54.
  47. Ugur Lel, 2006. "Currency hedging and corporate governance: a cross-country analysis," International Finance Discussion Papers 858, Board of Governors of the Federal Reserve System (U.S.).
  48. Judy C. Lewent & A. John Kearney, 1990. "Identifying, Measuring, And Hedging Currency Risk At Merck," Journal of Applied Corporate Finance, Morgan Stanley, vol. 2(4), pages 19-28.
  49. 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.
  50. Sohnke M. Bartram, 2001. "Corporate Risk Management as a Lever for Shareholder Value Creation," Finance 0108002, EconWPA, revised 10 Aug 2001.
  51. Tom Copeland & Maggie Copeland, 1999. "Managing Corporate FX Risk: A Value-Maximizing Approach," Financial Management, Financial Management Association, vol. 28(3), Fall.
  52. Rajgopal, Shivaram & Shevlin, Terry, 2002. "Empirical evidence on the relation between stock option compensation and risk taking," Journal of Accounting and Economics, Elsevier, vol. 33(2), pages 145-171, June.
  53. Hayne E. Leland, 1998. "Agency Costs, Risk Management, and Capital Structure," Journal of Finance, American Finance Association, vol. 53(4), pages 1213-1243, 08.
  54. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
  55. Tufano, Peter, 1996. " Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry," Journal of Finance, American Finance Association, vol. 51(4), pages 1097-1137, September.
  56. Christine M. Cumming & Beverly Hirtle, 2001. "The challenges of risk management in diversified financial companies," Economic Policy Review, Federal Reserve Bank of New York, issue Mar, pages 1-17.
  57. S. Waite Rawls & Charles W. Smithson, 1990. "Strategic Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 2(4), pages 6-18.
  58. John R. Graham & Clifford W. Smith, 2000. "Tax Progressivity And Corporate Incentives To Hedge," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(4), pages 102-111.
  59. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, vol. 32(2), pages 337-47, May.
  60. David Carter & Joseph Sinkey, 1998. "The Use of Interest Rate Derivatives by End-users: The Case of Large Community Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 14(1), pages 17-34, July.
  61. Guay, Wayne R., 1999. "The impact of derivatives on firm risk: An empirical examination of new derivative users1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 319-351, January.
  62. Weiss, Lawrence A., 1990. "Bankruptcy resolution: Direct costs and violation of priority of claims," Journal of Financial Economics, Elsevier, vol. 27(2), pages 285-314, October.
  63. Mello, Antonio S & Parsons, John E, 2000. "Hedging and Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 127-53.
  64. 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 281-96, April.
  65. J. Tobin, 1958. "Liquidity Preference as Behavior Towards Risk," Review of Economic Studies, Oxford University Press, vol. 25(2), pages 65-86.
  66. Peter Tufano, 1998. "Agency Costs of Corporate Risk Management," Financial Management, Financial Management Association, vol. 27(1), Spring.
  67. 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.
  68. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
  69. G. Dionne & M. Garand, 2000. "Risk Management Determinants Affecting Firms' Values in the Gold Mining Industry : New Empirical Results," THEMA Working Papers 2000-48, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  70. Catherine M. Schrand & Haluk Unal, 1995. "Hedging and Coordinated Risk Management: Evidence from Thrift Conversions," Center for Financial Institutions Working Papers 96-05, Wharton School Center for Financial Institutions, University of Pennsylvania.
  71. DeMarzo, Peter M. & Duffie, Darrell, 1991. "Corporate financial hedging with proprietary information," Journal of Economic Theory, Elsevier, vol. 53(2), pages 261-286, April.
  72. René M. Stulz, 1996. "Rethinking Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(3), pages 8-25.
  73. Warner, Jerold B., 1977. "Bankruptcy, absolute priority, and the pricing of risky debt claims," Journal of Financial Economics, Elsevier, vol. 4(3), pages 239-276, May.
  74. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
  75. Stulz, René M., 1984. "Optimal Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(02), pages 127-140, June.
  76. René M. Stulz, 2000. "Financial Structure, Corporate Finance and Economic Growth," International Review of Finance, International Review of Finance Ltd., vol. 1(1), pages 11-38.
  77. L. Lee Colquitt & Robert E. Hoyt & Ryan B. Lee, 1999. "Integrated Risk Management and the Role of the Risk Manager," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 2(3), pages 43-61, 09.
  78. David A. Carter & Daniel A. Rogers & Betty J. Simkins, 2006. "Does Hedging Affect Firm Value? Evidence from the US Airline Industry," Financial Management, Financial Management Association, vol. 35(1), Spring.
  79. Comment, Robert & Jarrell, Gregg A., 1995. "Corporate focus and stock returns," Journal of Financial Economics, Elsevier, vol. 37(1), pages 67-87, January.
  80. Galai, Dan & Masulis, Ronald W., 1976. "The option pricing model and the risk factor of stock," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 53-81.
  81. Chen-Miao Lin & Stephen D. Smith, 2007. "Hedging, Financing and Investment Decisions: A Simultaneous Equations Framework," The Financial Review, Eastern Finance Association, vol. 42(2), pages 191-209, 05.
  82. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1994. "A Framework For Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(3), pages 22-33.
  83. Mian, Shehzad L., 1996. "Evidence on Corporate Hedging Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(03), pages 419-439, September.
  84. James Moore & Jay Culver & Bonnie Masterman, 2000. "Risk Management For Middle Market Companies," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(4), pages 112-119.
  85. 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 637-54, May-June.
  86. Geczy, Christopher & Minton, Bernadette A & Schrand, Catherine, 1997. " Why Firms Use Currency Derivatives," Journal of Finance, American Finance Association, vol. 52(4), pages 1323-54, September.
  87. George Allayannis & Gregory W. Brown & Leora F. Klapper, 2003. "Capital Structure and Financial Risk: Evidence from Foreign Debt Use in East Asia," Journal of Finance, American Finance Association, vol. 58(6), pages 2667-2710, December.
  88. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  89. 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.
  90. Henk Berkman & Michael E. Bradbury, 1996. "Empirical Evidence on the Corporate Use of Derivatives," Financial Management, Financial Management Association, vol. 25(2), Summer.
  91. Gerald D. Gay & Jouahn Nam, 1998. "The Underinvestment Problem and Corporate Derivatives Use," Financial Management, Financial Management Association, vol. 27(4), Winter.
  92. Henry T. C. Hu, 1996. "Behind The Corporate Hedge: Information And The Limits Of "Shareholder Wealth Maximization"," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(3), pages 39-52.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:45420. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.