Corporate Risk Management as a Lever for Shareholder Value Creation
Söhnke M. Bartram
Warwick Business School - Department of Finance; New York University (NYU) - Department of Finance
Firm value is influenced in many direct and indirect ways by financial risks which consist of unexpected changes in foreign exchange rates, interest rates and commodity prices. The fact that a significant number of corporations are committing resources to risk management activities is, however, only an indication for the potential of corporate risk management to increase firm value. This paper presents a comprehensive analysis of positive theories and their empirical evidence regarding the contribution of corporate risk management to shareholder value. It is argued that because of realistic capital market imperfections, such as agency costs, transaction costs, taxes, and increasing costs of external financing, risk management at the firm level (as opposed to risk management by stock owners) represents a means to increase firm value to the benefit of the shareholders.
Number of Pages in PDF File: 84
Keywords: Risk management, agency cost, hedging, shareholder value, taxes, transaction cost, derivatives
JEL Classification: G3, F4, F3
Date posted: August 10, 2001