EFZG working paper series, No. 14, 2007.
Ostalo
A review of the rationales for corporate risk management: fashion or the need?
Danijela Miloš Sprčić
; Ekonomski fakultet u Zagrebu
Metka Tekavčić
; Faculty of Economics, University of Ljubljana
Željko Šević
; University of Greenwich Business School
Sažetak
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.
Ključne riječi
corporate risks; rationales of risk management
Hrčak ID:
137176
URI
Datum izdavanja:
11.7.2007.
Posjeta: 2.353 *