Rationales for Corporate Risk Management - A Critical Literature Review

36 Pages Posted: 19 Jan 2013

See all articles by Barbara Monda

Barbara Monda

RiskGovernance - Politecnico di Milano, Management, Economics and Industrial Engineering Department

Marco Giorgino

Polytechnic University of Milan

Ileana Modolin

the FinC - Politecnico di Milano, Management, Economics and Industrial Engineering

Date Written: January 18, 2013

Abstract

This paper describes theoretical motivations for corporate risk management activities and empirical evidence provided by different scholars on such rationales. These theoretical considerations can be extended also to the new risk management practices such as enterprise risk management. Based on modern financial theory’s assumption that markets are perfectly efficient, organizations should not implement risk management practices since they cannot contribute to add firm value. However, in the presence of market imperfections, risk management, stabilizing firm’s earnings, can benefit companies in the following manners: reducing transaction costs especially the expected costs of bankruptcy, lowering corporate taxes, aligning financing and investment policies and reducing costs associated with agency problems and asymmetric information.

Keywords: Risk Management, hedging, market imperfections, agency problem, underinvestment problem, cost of financial distress, transaction costs

JEL Classification: G32

Suggested Citation

Monda, Barbara and Giorgino, Marco and Modolin, Ileana, Rationales for Corporate Risk Management - A Critical Literature Review (January 18, 2013). Available at SSRN: https://ssrn.com/abstract=2203546 or http://dx.doi.org/10.2139/ssrn.2203546

Barbara Monda (Contact Author)

RiskGovernance - Politecnico di Milano, Management, Economics and Industrial Engineering Department ( email )

Piazza Leonardo da Vinci, 32
Milano, 20133
Italy

HOME PAGE: http://www.risk-governance.eu

Marco Giorgino

Polytechnic University of Milan ( email )

vial Lambruschini 4B
Milan, Milan 20156
Italy

Ileana Modolin

the FinC - Politecnico di Milano, Management, Economics and Industrial Engineering ( email )

Piazza Leonardo da Vinci, 32
Milano, 20133
Italy

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