Type of Document Master's Thesis Author Roselle, Russell Paul Author's Email Address email@example.com URN etd-04252006-145221 Title Rational Corporate Risk Management Policy: An Extension of Traditional Risk Management Theory to Incorporate Observed Managerial Behavior Degree Master of Arts Department Economics Advisory Committee
Advisor Name Title Tideman, Thorwald Nicolaus Committee Chair Ashley, Richard A. Committee Member Ball, Sheryl B. Committee Member Keywords
- Corporate Risk Management
- Return Requirements
- Corporate Insurance and Hedging Policy
- Corporate Capital Structure
Date of Defense 2006-04-14 Availability unrestricted AbstractRational Corporate Risk Management Policy: An Extension of Traditional Risk Management Theory to Incorporate Observed Managerial Behavior
Russell Paul Roselle
There is qualitative and anecdotal evidence that corporate management deviates from received risk management theory. These deviations include: an overall hesitancy to accept projects with greater levels of total risk, increased return requirements compensating for firm-specific risk, employment of hedging strategies, the insuring of diversifiable risks, corporate diversification outside of the industry constraint, and the utilization of portfolio and other variance reducing methods. The literature primarily contributes these behaviors to principal/agent conflicts.
Evidence from studies on these deviations support strong arguments based in resource scarcity, cost and availability of capital, employee/community stability, and the increases in bankruptcy costs that these risk management deviation are in the interest of shareholders. When considered in the context of the long-term impact on value, the observed deviations from received corporate risk management theory contribute substantively to the perpetuation of the firm as a long-term store of value.
This paper supports two hypotheses: (1) the deviation from received risk management theory by corporate managers is broadly practiced, and (2) these deviations are generally in the interest of shareholders.
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