On Risk Management Determinants: What Really Matters?

HEC Montreal Risk Management Chair Working Paper No. 04-04

38 Pages Posted: 28 Jun 2004 Last revised: 22 Feb 2012

See all articles by Georges Dionne

Georges Dionne

HEC Montreal - Department of Finance

Thouraya Triki

HEC Montreal

Date Written: June 21, 2004

Abstract

We investigate the determinants of the risk management decision for an original dataset of North American gold mining firms. We propose explanations based on the firm’s financial characteristics, managerial risk aversion and internal corporate governance mechanisms. We develop a theoretical model in which the debt and the hedging decisions are made simultaneously. Our model suggests that more hedging does not always lead to a higher debt capacity when the firm holds a standard debt contract, while hedging is an increasing function of the firm’s financial distress costs. We then test the predictions of our model. To estimate our system of simultaneous Tobit equations, we extend, to panel data, the minimum distance estimator proposed by Lee (1995). We obtain that financial distress costs, information asymmetry, separation between the posts of CEO and chairman of the board positions and managerial risk aversion are important determinants of the decision to hedge whereas the composition of the board of directors has no impact in such decision. Also, our results do not support the conclusion that firms hedge in order to increase their debt capacity which seems to confirm our model’s prediction.

Keywords: Risk management determinants, corporate hedging, capital structure, managerial risk aversion, gold price, tax incentive, minimum distance estimator, panel data, Tobit, corporate governance.

JEL Classification: D80, G10.

Suggested Citation

Dionne, Georges and Triki, Thouraya, On Risk Management Determinants: What Really Matters? (June 21, 2004). HEC Montreal Risk Management Chair Working Paper No. 04-04. Available at SSRN: https://ssrn.com/abstract=558761 or http://dx.doi.org/10.2139/ssrn.558761

Georges Dionne (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

Thouraya Triki

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

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