Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. This content downloaded from 165.190.89.176 on Sun, ABSTRACT This article examines a new database that details corporate risk management activity in the North American gold mining industry. I find little empirical support for the predictive power of theories that view risk management as a means to maximize shareholder value. However, firms whose managers hold more options manage less gold price risk, and firms whose managers hold more stock manage more gold price risk, suggesting that managerial risk aversion may affect corporate risk management policy. Further, risk management is negatively associated with the tenure of firms' CFOs, perhaps reflecting managerial interests, skills, or preferences.ACADEMICS KNOW REMARKABLY little about corporate risk management practices, even though almost three-fourths of corporations have adopted at least some financial engineering techniques to control their exposures to interest rates, foreign exchange rates, and commodity prices.' While theorists continue to advance new rationales for corporate risk management, empiricists seeking to test if practice is consistent with these theories have been stymied by a lack of meaningful data. Corporations disclose only minimal details of their risk management programs, and, as a result, most empirical analyses have to rely on surveys and relatively coarse data that at best discriminate between firms that do and do not use specific types of derivative instruments. Case studies of individual firms, while providing greater detail on firm practices, typically lack cross-sectional variation to test whether existing theories explain behavior.As a result of data limitations, for most industries we cannot describe which firms manage more risk than others or whether firms engage in dynamic risk management-strategies. More importantly, we cannot reliably test whether * Harvard Business School. I would like to thank Conference on Corporate Risk Management for their comments on this research. I gratefully acknowledge the cooperation of Ted Reeve who allowed me to use his surveys of gold mining firms' risk management activities. B. J. Whalen and Jonathan Headley provided invaluable research support. The Division of Research at Harvard Business School provided financial support for this research, which was completed as part of the Global Financial Systems project. ' The Wharton/Chase Derivatives Survey (1995) reports that over 70 percent of firms use derivatives to hedge commitments. 1097 This content downloaded from 165.190.89.176 on Sun, 05 Jul 2015 09:14:41 UTC All use subject to JSTOR Terms and Conditions 1098 The Journal of Finance firms' risk management practices conform with existing theories. This article desc...

The Determinants of Foreign Currency Hedging–Evidence from Hong Kong Non-Financial Firms

“…Following prior studies, we differentiate firms involving currency only hedging and other hedging activities including interest rate risk hedging in the test. (iii) Investment hypothesis and size effect: whether small and/or growth firms are less likely to hedge (Bessembinder, 1991;Tufano, 1996;Geczy et al, 1997;Allyannis and Ofek, 2000). To test the hypothesis that hedging increases firms' incentive to positive NPV investment, this paper uses four proxies for growth options in the firm's investment opportunity set.…”

“…The data is obtained from biographical details of directors and management. 6 This allows us to test whether managerial interests and skills affect hedging activities (Tufano, 1996;Grinblatt and Titman, 2002). In addition, this paper applies a dummy variable equal to 1 if the companies are originally from the mainland of China but also have foreign operations in other countries.…”

“…Prior studies also link firm size to hedging activities. Nance et al (1993), Mian (1996), Tufano (1996), Geczy et al (1997, and Allyannis and Ofek (2000) argue that economies of scale exist in acquiring information on hedging techniques and instruments for larger firms, which have advantages in reducing transaction costs in trading financial derivatives. This implies that larger firms are more likely to hedge and smaller firms have less incentive to hedge.…”

“…They interpret that smaller firms are faced with greater information asymmetric, which leads to higher financing transaction costs and additional costs of external financing, so hedging may reduce these costs. Finally, Tufano (1996) shows that managerial interests, skills and preferences may be important determinates of risk management activities.…”

“…Second, managers' motivation and ability are important determinants on firms' risk hedging activities. Managerial risk-aversion and managers' ability to signal have long been examined as drivers of corporate risk management (Stulz, 1984;Smith and Stulz, 1985;Demarzo and Duffie, 1995;Breeden and Viswanathan, 1996;Tufano, 1996). Grinblatt and Titman (2002) believe that the growing understanding of financial derivative contributes to managers' increasing acceptance as instruments for risk hedging.…”