Are Exogenous Requirements Sufficient Enough to Induce Corporate Risk Management Activities?

Posted: 17 Sep 2011

See all articles by Ales S. Berk

Ales S. Berk

FELU / University of Ljubljana - Faculty of Economics

Igor Loncarski

University of Ljubljana - Faculty of Economics

Date Written: September 16, 2011

Abstract

In this paper we report the current practices of risk management in Slovenian companies and relate the incentives for risk management in the country’s post-transitional legal and business environment to the neoclassical theoretical motives for risk management. We find that in such an environment, which more or less characterises most Eastern European countries, neoclassical theoretical motives do not provide sufficient (endogenous) incentives for shareholders and managers to manage risk within their firms. We argue that the compulsory use of International Financial Reporting Standard (‘IFRS’) disclosure requirements induces managers to actively analyse and manage risks. We see this exogenous push as a necessary but unfortunately not a sufficient mechanism to induce managers to manage risk within their firms since managers perceive the reporting requirements primarily as cost-enhancing. We argue that, in order to endogenise the incentives, governments need to create market conditions in which managers will also see the added value of risk management. This will predominantly require a change in corporate governance mechanisms.

Keywords: risk management, derivatives, survey results, regulation, institutional factors

JEL Classification: G3

Suggested Citation

Berk, Ales S. and Lončarski, Igor, Are Exogenous Requirements Sufficient Enough to Induce Corporate Risk Management Activities? (September 16, 2011). Post-Communist Economies, Vol. 23, No. 1, 2011. Available at SSRN: https://ssrn.com/abstract=1928795

Ales S. Berk (Contact Author)

FELU / University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia

Igor Lončarski

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, SI-1000
Slovenia
+386 5892 628 (Phone)
+386 5892 698 (Fax)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
313
PlumX Metrics