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

Abstract

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.

Hedging to market‐wide shocks and competitive selection

“…This prediction contrasts with the common theory‐based view where smaller and financially constrained firms are more likely to engage in hedging (Froot et al, 1993; Tufano, 1996). Our prediction does, however, line up well with evidence that larger and financially more stable firms are more likely to use derivatives and engage in risk management (see, e.g., Asai, 2019; Geyer‐Klingeberg et al, 2018; Giambona et al, 2018; Rampini et al, 2014). Intuitively, the most efficient firms find it attractive to bear the cost of hedging since they stand to lose the most if they fail, and, in addition, they can remain competitive even after the cost of hedging has pushed up their marginal cost.…”

“…We thus use the term hedging to include ways of managing risk that relies on the use of financial contracts (such as insurance or derivatives), on operational hedging (such as diversification), or on ensuring access to liquidity. In practice several forms of managing risk can be used simultaneously as indeed documented in case studies (e.g., airlines in Treanor et al, 2014, and shipping in Alexandridis, Sahoo, et al, 2018), in surveys (Giambona et al, 2018), and in textual analysis of annual reports (Friberg & Seiler, 2021); see Friberg (2015) for a broad overview.…”

Pengaruh Ideologi Etik dan Kecerdasan Spiritual Terhadap Hubungan Antara Partisipasi dan Senjangan Anggaran

“…Bukti empiris lainnya yang ditemukan, menunjukkan bahwa senjangan anggaran didefinisikan sebagai pengungkapan penggabungan sejumlah anggaran yang dibuat mudah untuk dicapai. Manajer kemungkinan memasukkan senjangan dalam suatu anggaran sebagai strategi dengan cara memperkecil pendapatan dan memperbesar biaya (Giambona et al, 2018), Argumen utama lainnya yaitu upaya manager untuk membangun senjangan dalam anggaran mereka adalah untuk menaikkan peluang kompensasi mereka. Jika bawahan menganggap bahwa penghargaan (reward) mereka tergantung pada pencapaian anggaran, maka kemungkinan bagi mereka untuk mencoba memasukkan senjangan ke dalam anggaran mereka melalui proses partisipasi lihat misalnya, (Horváth & Sauter, 2004;Lowe & Shaw, 1968).…”

Corporate financial hedging and firm value: a meta-analysis

“…Corporate hedging behavior 1 and its impact on firm valuations have attracted widespread attention in the corporate finance literature (among many others, Bartram et al, 2011;Bessler et al, 2019;Carter et al, 2006;Giambona et al, 2018;Jin and Jorion, 2006;MacKay and Moeller, 2007;Pérez-González and Yun, 2013). Despite a long series of empirical evidence investigating firm-level data to determine if corporate hedging is a value-enhancing strategy, literature remains largely unsettled, particularly in regard to two dimensions.…”