Alleviating Coordination Problems and Regulatory Constraints Through Financial Risk Management

46 Pages Posted: 30 Aug 2011

See all articles by Marcel Boyer

Marcel Boyer

CIRANO, Université de Monréal

M. Martin Boyer

HEC Montreal - Department of Finance

René Garcia

Université de Montréal ; Toulouse School of Economics

Date Written: May 29, 2011

Abstract

We characterize a firm as a nexus of activities and projects with their associated cash flow distributions across states of the world and time periods. We propose a characterization of the firm where variations in the market price of risk induce adjustments in the value-maximizing combination of projects. Changing the portfolio of projects generates coordination costs. We propose a new role for financial risk management based on the idea that the use of financial derivatives may reduce coordination costs. We find empirical support for this new rationale for the use of financial derivatives, after controlling for the traditional variables explaining the need for financial risk management.

Keywords: Risk Management, firm value, coordination problems, hedging, value at risk

JEL Classification: G32, D2, L2

Suggested Citation

Boyer, Marcel and Boyer, M. Martin and Garcia, René, Alleviating Coordination Problems and Regulatory Constraints Through Financial Risk Management (May 29, 2011). CIRANO - Scientific Publication No. 2011s-48, Available at SSRN: https://ssrn.com/abstract=1919166 or http://dx.doi.org/10.2139/ssrn.1919166

Marcel Boyer (Contact Author)

CIRANO, Université de Monréal ( email )

1400-1130 Sharbrooke St. West
Montreal, Quebec H3A 2M8
Canada
514 985-4000 (Phone)
514-985-4039 (Fax)

HOME PAGE: http://www.cirano.qc.ca/~boyerm

M. Martin Boyer

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

René Garcia

Université de Montréal ( email )

C.P. 6128, succursale Centre-Ville
3150, rue Jean-Brillant, bureau C-6027
Montreal, Quebec H3C 3J7
Canada
514-7018807 (Phone)

HOME PAGE: http://https://myrenegarcia.wordpress.com

Toulouse School of Economics ( email )

Toulouse
France

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