The Theory and Practice of Corporate Risk Management: Evidence from the Field

56 Pages Posted: 22 Mar 2018 Last revised: 3 Aug 2018

See all articles by Erasmo Giambona

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)

Gordon M. Bodnar

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

Date Written: March 13, 2018

Abstract

We survey more than 1,100 risk managers from around the world on their risk management policies, goals, and perceptions. We find evidence consistent with some of the traditional theories of risk management, but not with all. We then analyze the reasons beyond “why” or “why not” firms hedge. We find that almost 90% of the risk managers in non-financial firms hedge to increase expected cash flows. We also find that 70%-80% of the risk managers say that they hedge to smooth earnings or to satisfy shareholders’ expectations. Our analysis also suggests that regulatory changes (e.g., Dodd-Frank Act of 2010) and new accounting rules put in place to increase market stability might discourage corporate hedging. Finally, we provide comprehensive evidence about hedging in the context of six forms of risk: interest rate, foreign exchange, commodity, energy, credit, and geopolitical risk. Among other things, we find that operational hedging is more common than hedging with financial contracts in all risk areas except foreign exchange.

Keywords: Corporate risk management, Expected cash flows, Risk aversion, Agency theory, Credit rationing, Information uncertainty, Financial distress, Dodd-Frank, Regulations, Operational/financial hedging methods

JEL Classification: G32, G38, M16, M41

Suggested Citation

Giambona, Erasmo and Graham, John Robert and Harvey, Campbell R. and Bodnar, Gordon M., The Theory and Practice of Corporate Risk Management: Evidence from the Field (March 13, 2018). Available at SSRN: https://ssrn.com/abstract=3143797 or http://dx.doi.org/10.2139/ssrn.3143797

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 Robert 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 R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

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

HOME PAGE: http://www.duke.edu/~charvey

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gordon M. 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)

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