A View Inside Corporate Risk Management
Gordon M. Bodnar, Erasmo Giambona, John R. Graham, Campbell R. Harvey
Management Science · 2019 · Volume 65 · Issue 11
Abstract
Why do firms manage risk? According to various theories, firms hedge to mitigate credit rationing, to alleviate information asymmetry, and to reduce the risk of financial distress. However, empirical support for these theories is mixed. Our paper addresses the “why” by directly asking the managers that make risk management decisions. Our results suggest that personal risk aversion in combination with other executive traits plays a key role in hedging. Our analysis also indicates that risk-averse executives are more likely to rely on (more conservative) fat-tailed distributions to estimate risk exposure. While most theories of risk management ignore the human dimension, our results suggest that managerial traits play an important role. This paper was accepted by Karl Diether, finance.
Keywords
risk management, hedging, managerial risk aversion, behavioral finance, manager fixed effects, interest rate risk, credit risk, commodity risk, foreign exchange risk
Enable JavaScript for citation tools and additional paper interactions.