Hedging and Coordinated Risk Management: Evidence from Thrift Conversions
Posted: 3 Jul 1998
Date Written: December 1995
We provide an explanation for hedging as a means of allocating rather than reducing risk. We argue that firms facing a total risk constraint optimally allocate risk by reducing (increasing) exposure to risks providing zero (positive) economic rents. Our evidence suggests that mutual thrifts which convert to stock institutions reduce interest-rate risk through improved balance sheet maturity matching and increased derivatives use at the time of conversion. This interest-rate risk reduction is followed by slower growth in credit risk. Post-conversion, risk management activities are significantly related to growth capacity and management compensation structure attained at conversion.
JEL Classification: G21, G32
Suggested Citation: Suggested Citation