34 Pages Posted: 20 May 2014 Last revised: 16 Nov 2016
Date Written: November 15, 2016
Why do firms manage risk? According to theory, firms hedge to mitigate credit rationing, to alleviate information asymmetry, and to reduce the risk of financial distress. Empirical support for these theories is mixed. Our paper addresses the “why” by directly questioning the managers that make risk management decisions. Our results suggest that personal risk aversion in combination with other executive traits plays a key role in hedging. Our analysis also indicates that risk averse executives are more likely to rely on (more conservative) fat-tailed distributions to estimate risk exposure. While most theories of risk management ignore the human dimension, our results suggest that managerial traits play an important role. Presentation slides for this paper and other research are presented in “A Guide to Corporate Risk Management” which is available at http://ssrn.com/abstract=2479483.
Keywords: Risk Management, Hedging, Managerial Risk Aversion, Behavioral Finance, Manager fixed-effects, Interest rate risk, Credit risk, Commodity risk, Foreign exchange risk
JEL Classification: D21, G12, G30, G32, L21, M41
Suggested Citation: Suggested Citation
Bodnar, Gordon M. and Giambona, Erasmo and Graham, John R. and Harvey, Campbell R., A View Inside Corporate Risk Management (November 15, 2016). Duke I&E Research Paper No. 16-6. Available at SSRN: https://ssrn.com/abstract=2438884 or http://dx.doi.org/10.2139/ssrn.2438884