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The relevance of corporate risk management function and its influence on the company's value

The relevance of corporate risk management function and its influence on the company's value

Milos-Spricic, Danijela, Tekavcic, Metka and Sevic, Zeljko (2007) The relevance of corporate risk management function and its influence on the company's value. Racunovodstvo, 51 (5-6). pp. 5-23. ISSN 1450-6114

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Abstract

For a long time it was believed that corporate risk management is irrelevant to the value of the firm and the arguments in favor of the irrelevance were based on the Capital Asset Pricing Model and the Modigliani-Miller theorem. However, it is apparent that managers are constantly engaged in hedging activities that are directed at the reduction of unsystematic risk. In the real world, financial managers and treasurers give a great deal of thought to matters of capital structure and securities design. Additionally, the corporate use of derivatives in hedging interest rate, currency, and commodity price risks is widespread and growing. As an explanation for this clash between theory and practice, imperfections in the capital market are used to argue for the relevance of corporate risk management function. Scholars have constructed two classes of explanations or determinants for management concern with hedging of non-systematic risk, which overcome the irrelevancy arguments of modern portfolio and corporate finance theory. The first class of explanations focuses on risk management as a mean to maximize shareholder value, and the second focuses on risk management as a mean to maximize managers' private utility. This paper presents the extensive literature survey based both on theoretical rationales for hedging as well as the empirical evidence that support the implications of the theory regarding the arguments for the corporate risk management relevance and its influence on the company's value.

Item Type: Article
Additional Information: Šević, Željko [Original spelling] This article was published in Serbian and English.
Uncontrolled Keywords: risk management, company value
Faculty / Department / Research Group: Faculty of Business > Department of Accounting & Finance
Related URLs:
Last Modified: 14 Oct 2016 09:08
Selected for GREAT 2016: None
Selected for GREAT 2017: None
Selected for GREAT 2018: None
Selected for GREAT 2019: None
URI: http://gala.gre.ac.uk/id/eprint/3047

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