Some determinants of corporate risk aversion

Some determinants of corporate risk aversion

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Article ID: iaor200819
Country: United States
Volume: 3
Issue: 4
Start Page Number: 233
End Page Number: 251
Publication Date: Dec 2006
Journal: Decision Analysis
Authors:
Keywords: risk
Abstract:

In this paper we roughly quantify the degree of risk aversion induced by three rationales for corporate risk management: the cost of financial distress, costly external finance, and the principal–agent relationship between shareholders and management. In so doing, we provide a foundation for the use of corporate utility functions. However, we are unable to fully support the degree of risk aversion reported in the decision analysis literature. Specifically, financial distress and costly external finance appear to induce relatively little risk aversion, while principal–agent concerns lend only partial support to published corporate risk tolerance guidelines.

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