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A View Inside Corporate Risk Management

34 Pages Posted: 20 May 2014 Last revised: 16 Nov 2016

Gordon M. Bodnar

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS)

Erasmo Giambona

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

Date Written: November 15, 2016

Abstract

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

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

Gordon Bodnar

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

1740 Massachusetts Avenue, NW
Washington, DC 20036
United States
202-663-7731 (Phone)
202-663-7718 (Fax)

Erasmo Giambona

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate ( email )

721 University Avenue
RM 120-D
Syracuse, NY 13244-2450
United States
315 443-4885 (Phone)

John Graham

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Campbell Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

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