Essays on Corporate Risk Management

Abstract: Companies spend a lot of attention and resources on something commonly referred to as ‘risk management’. Despite its apparent importance and intuitive appeal, corporate risk management is fraught with many difficulties, both on the conceptual and practical level. This may partly be explained by the fact that the role of risk management in increasing firm value is not very clear-cut. A contributing factor is also the sheer complexity of modern organizations themselves, with multiple layers of decision-makers who may have different incentives and views on which risks ought to be managed and why. As a consequence of these complexities, understanding risk management processes in companies remain a challenge to researchers. This thesis contains seven essays that explore the topic of corporate risk management. It is divided into three sections. The first (Essays 1 and 2) analyzes the circumstances under which risk management can be shown to be beneficial to a company, especially with regard to how illiquidity in the market for corporate assets creates a demand for risk management. The second (Essays 3 and 4) asks if information on the organization of the risk management function matters for explaining hedging patterns in corporate groups. It specifically looks at whether centralization of the hedging decision influences hedge ratios and the market premium associated with corporate hedging. The third (Essays 5, 6, and 7) seek to identify attractive properties of measures of corporate risk. The basic premise is that focus ought to be shifted away from silo-based risk quantification efforts, such as Value-at-Risk (VaR) applied to a limited portfolio of financial instruments, to aggregate measures of enterprise risk that provide information on how various corporate policies drive the firm’s risk profile.

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