A review of the rationales for corporate risk management: fashion or the need?
| Autor: | Sprčić, Danijela Miloš, Tekavčič, Metka, Šević, Željko |
|---|---|
| Rok vydání: | 2007 |
| Předmět: |
Risk Management
Transitional Economies Perception and Management of Risk Empirical Surveys P31 perception and management of risk empirical Surveys jel:G30 corporate risks rationales of risk management Risk Management Transitional Economies Perception and Management of Risk Empirical Surveys risk management jel:G32 jel:G39 ddc:330 jel:P31 G32 transitional economies corporate risks rationales of risk management G30 |
| Zdroj: | EFZG working paper series Issue 14 |
| ISSN: | 1849-6857 |
| Popis: | 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. If corporate hedging decisions are capable of increasing firm values, they can do so by reducing the volatility of cash flows. The literature survey presented in this paper has revealed that, by hedging financial risks firms can decrease cash flow volatility, what leads to a lower variance of firm value. This means that not only a firm value is moving less, but that the probability of occurring low values is smaller than without hedging. Reduced volatility of cash flows results in decreased costs of financial distress and expected taxes, thereby enhancing the present value of expected future cash flows. Additionally, it reduces the costs associated with information “asymmetries” by signalling management's view of the company's prospects to investors, or it reduces agency problems. In addition, reducing cash flow volatility can improve the probability of having sufficient internal funds for planned investments eliminating the need either to cut profitable projects or bear the transaction costs of obtaining external funding. However, it needs to be emphasised that there is no consensus as to what hedging rationale is the most important in explaining risk management as a corporate policy. It can be concluded 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. |
| Databáze: | OpenAIRE |
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