Risk Sharing, Fiduciary Duty, and Corporate Risk Attitudes

James E. Smith ()
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James E. Smith: Fuqua School of Business, Duke University, Box 90120, Durham, North Carolina 27708-0120

Decision Analysis, 2004, vol. 1, issue 2, 114-127

Abstract: In this paper, we consider the problem of determining corporate risk preferences that reflect the preferences of the company's shareholders. Although we do not assume that the company necessarily has a utility function, we can use shareholder risk preferences to place bounds on the firm's risk tolerances and certainty equivalents. Using these bounds with published estimates for individual risk tolerances, we find that large companies with reasonably diversified shareholders should have risk tolerances that are much larger than those typically suggested in the decision analysis literature. We also find that, in contrast with what is commonly assumed in the finance literature, market prices for gambles generally do not reflect the interests of shareholders, and market-value maximization can lead to the selection of dominated alternatives.

Keywords: decision analysis; risk attitudes; risk sharing; corporate decision making (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ordeca:v:1:y:2004:i:2:p:114-127

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