Firm Type Variation in the Cost of Risk Management

72 Pages Posted: 16 Jun 2016 Last revised: 8 Jun 2020

See all articles by Sabrina T Howell

Sabrina T Howell

New York University (NYU) - Leonard N. Stern School of Business

Date Written: June 5, 2020

Abstract

This paper explores how the cost of risk management varies with firm characteristics, offering the first comparison between private, public, and family-owned firms. It exploits a natural experiment in highway procurement, which features diverse firms with common exposure to commodity risk. The Kansas government began to insure highway paving firms against oil price risk in 2006. The analysis compares Kansas to Iowa, which has an otherwise similar highway procurement system but never introduced such a policy. Using data from 1998 to 2012, I show that the policy reduced average bid sensitivity to oil price volatility. Private firms with high credit risk and low industry diversification exhibit the most risk pass-through, while public firms exhibit no pass-through. Family-owned firms do not have a higher than average cost of risk. Financial constraints and distress costs appear to best explain the cost of risk management, rather than risk aversion, information, or agency problems.

JEL Classification: G13, G14, G38, G32, Q47

Suggested Citation

Howell, Sabrina T, Firm Type Variation in the Cost of Risk Management (June 5, 2020). Available at SSRN: https://ssrn.com/abstract=2795558 or http://dx.doi.org/10.2139/ssrn.2795558

Sabrina T Howell (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

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