A View Inside Corporate Risk Management

Bodnar, Gordon M.; Giambona, Erasmo; Graham, John R.; Harvey, Campbell R.

doi:10.1287/mnsc.2018.3081

Cited by 46 publications

(29 citation statements)

References 82 publications

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“…As predicted by agency models, we find that firms with risk‐averse managers are significantly more likely to hedge (in line with evidence in Bodnar et al., ). We note that these results hold when controlling for the nature of management compensation.…”

Section: Why Do Firms Establish Risk Management Programs?supporting

confidence: 90%

The Theory and Practice of Corporate Risk Management: Evidence from the Field

Giambona¹,

Graham²,

Harvey³

et al. 2018

Financial Management

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We survey more than 1,100 risk managers from around the world regarding their risk management policies. We find evidence consistent with some traditional theories of risk management, but not with all. We then study “why” or “why not” firms hedge and find that almost 90% of risk managers in nonfinancial firms hedge to increase expected cash flow. We also find that 70% to 80% of risk managers hedge to smooth earnings or to satisfy shareholders’ expectations. Our analysis also suggests that regulatory changes implemented to increase market stability (e.g., Dodd‐Frank Act) could discourage corporate hedging. Finally, we provide evidence regarding hedging in six areas of risk: interest rate, foreign exchange, commodity, energy, credit, and geopolitical. We find that operational hedging is more common than financial hedging in all risk areas except foreign exchange.

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Section: Why Do Firms Establish Risk Management Programs?supporting

confidence: 90%

The Theory and Practice of Corporate Risk Management: Evidence from the Field

Giambona¹,

Graham²,

Harvey³

et al. 2018

Financial Management

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“…Debt cost depicts information asymmetry and is isomorphic to other capital market frictions such as financing cost and bankruptcy cost. Managerial risk aversion is supported by Bodnar, Giambona, Graham, and Harvey (2019) who find that risk aversion plays a key role in risk management. Giambona, Graham, Harvey, and Bodnar (2018) also show that more than 70% of risk managers hedge to reduce cash flow volatility.…”

Section: Introductionmentioning

confidence: 96%

The interaction of risk management tools: Financial hedging, corporate diversification and liquidity

Jiang

Feng

2020

Int. J Fin Econ

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What kind of firm benefits more from financial hedging, the focused or diversified? In fact, the benefit of financial hedging depends on diversification policies. By analyzing the interaction between financial hedging and corporate diversification in a theoretical model for a financially constrained firm, we find that focused firms have relatively higher marginal value of hedging in general static environment. However, dynamic analysis results show that an important synergy between financial hedging and diversification would reverse this result. Exercising corporate diversification policies has direct negative effect on liquidity and operating risk, thereby increasing the marginal value of financial hedging. As a result, it is possible that their relationship is complementary in a dynamic environment since these tools increase firm value in different channels. This suggests that firms could use financial hedging in the process of diversification if it is possible. Our findings also emphasize the importance of risk management capabilities which is hardly observable but contributes much to firm value.

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“…These and several other operational hedges are frequently utilized by U.S. and global firms(Bodnar, Giambona, Graham, and Harvey (2016)). …”

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confidence: 99%

Do managerial risk-taking incentives influence firms' exchange rate exposure?

Hasan

Hunter

Zhu

2017

Journal of Corporate Finance

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There is scant evidence on how risk-taking incentives impact specific firm risks. This has implications for board oversight of managerial risk taking, firms' development of comparative advantage in taking particular risks, and compensation design. We examine this question for exchange rate risk. Using multiple identification strategies, we find that vega increases exchange rate exposure for purely domestic and globally engaged firms. Vega's impact increases with international operations, declines post-SOX, and is robust to firm-level governance. Our results suggest that evidence that exposure reduces firm value can be viewed, in part, as a wealth transfer from shareholders and debt-holders to managers.

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A View Inside Corporate Risk Management

Cited by 46 publications

References 82 publications

The Theory and Practice of Corporate Risk Management: Evidence from the Field

The Theory and Practice of Corporate Risk Management: Evidence from the Field

The interaction of risk management tools: Financial hedging, corporate diversification and liquidity

Do managerial risk-taking incentives influence firms' exchange rate exposure?

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