Risk, the Limits of Financial Risk Management, and Corporate Resilience
Fisher College of Business WP No. 2024-03-015 and Charles A. Dice Center WP No. 2024-15
European Corporate Governance Institute – Finance Working Paper No. 1008/2024
HKU Jockey Club Enterprise Sustainability Global Research Institute - Archive
42 Pages Posted: 22 Aug 2024
Date Written: August 21, 2024
Abstract
Existing evidence shows convincingly that expected cash flows of non-financial firms can be negatively affected by their total risk, so that non-financial firms can create shareholder wealth by managing their total risk. After reviewing theories that demonstrate links between firm value and total risk, I examine how financial risk management is used to manage firm total risk. I conclude from the evidence that the use of financial risk management is mostly limited to near-term risk in non-financial firms. I offer explanations for this limited role of financial risk management. I argue that the limitations of financial risk management make it important for firms to also focus on resilience and call for more research on the costs and benefits of resilience.
Keywords: Risk, risk management, derivatives, hedging, resilience
JEL Classification: G32, G23
Suggested Citation: Suggested Citation