Could Risk Management Be Harmful to Firms?

Rui Li ()
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Rui Li: College of Management, University of Massachusetts

Annals of Economics and Finance, 2018, vol. 19, issue 1, 247-263

Abstract: Based on a theoretical model, this paper shows that risk management policies shielding firms from marketwide risk exposures could be harmful to the firms. Specifically, if a firm's operation is delegated to a manager and subject to moral hazard problems, risk exposures could align the manager's interests with the firm owner's so that they alleviate the moral hazard problems and raise the firm's value. As a result, the risk management policies could reduce the firm's value to the owner.

Keywords: risk management; dynamic contracts; moral hazard (search for similar items in EconPapers)
JEL-codes: D81 D82 G32 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2018:v:19:i:1:li

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