Corporate risk management: Costs and benefits |
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| Affiliation: | 1. College of Business Administration, University of Texas at El Paso, El Paso, TX, USA;2. Paul College of Business and Economics, University of New Hampshire, Durham, NH, USA;3. School of Business, Villanova University, Villanova, PA, USA;2. Lehigh University, Perella Department of Finance, 621 Taylor Street, Bethlehem, PA 18015, United States;1. College of Business, St. Ambrose University, Davenport, IA 52803, United States;2. Belk College of Business, University of North Carolina at Charlotte, Charlotte, NC 28223, United States |
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| Abstract: | This paper establishes a framework within which the costs and the benefits of corporate risk management decisions can be analyzed. The most important conclusion is that risk management strategies should be pursued to enhance shareholder value. Although systematic hedging of all variation in the net cashflows may be in the best interest of the management, such behavior is inconsistent with maximizing firm and shareholder value. The extant empirical evidence cited is supportive of the notion that the strongest motive for risk management behavior is the avoidance of financial distress. However, there are offsetting costs to consider as well. The existence of these costs makes it imperative that shareholders understand the risk management process. |
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