The value of corporate risk management

The value of corporate risk management

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Article ID: iaor2009771
Country: United Kingdom
Volume: 62
Issue: 3
Start Page Number: 1379
End Page Number: 1419
Publication Date: Jun 2007
Journal: Journal of Finance
Authors: ,
Keywords: risk
Abstract:

We model and estimate the value of corporate risk management. We show how risk management can add value when revenues and costs are nonlinearly related to prices and estimate the model by regressing quarterly firm sales and costs on the second and higher moments of output and input prices. For a sample of 34 oil refiners, we find that hedging concave revenues and leaving concave costs exposed each represent between 2% and 3% of firm value. We validate our approach by regressing Tobin's q on the estimated value and level of risk management and find results consistent with the model.

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