A view inside corporate risk management

Gordon M. Bodnar, Erasmo Giambona, John R. Graham, Campbell R. Harvey

Research output: Contribution to journalArticle

5 Scopus citations

Abstract

Why do firms manage risk? According to various theories, firms hedge to mitigate credit rationing, to alleviate information asymmetry, and to reduce the risk of financial distress. However, empirical support for these theories is mixed. Our paper addresses the “why” by directly asking the managers that make risk management decisions. Our results suggest that personal risk aversion in combination with other executive traits plays a key role in hedging. Our analysis also indicates that risk-averse executives are more likely to rely on (more conservative) fat-tailed distributions to estimate risk exposure. While most theories of risk management ignore the human dimension, our results suggest that managerial traits play an important role.

Original languageEnglish (US)
Pages (from-to)5001-5026
Number of pages26
JournalManagement Science
Volume65
Issue number11
DOIs
StatePublished - Nov 1 2019

Keywords

  • Behavioral finance
  • Commodity risk
  • Credit risk
  • Foreign exchange risk
  • Hedging
  • Interest rate risk
  • Manager fixed effects
  • Managerial risk aversion
  • Risk management

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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  • Cite this

    Bodnar, G. M., Giambona, E., Graham, J. R., & Harvey, C. R. (2019). A view inside corporate risk management. Management Science, 65(11), 5001-5026. https://doi.org/10.1287/mnsc.2018.3081