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

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