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Alleviating Coordination Problems and Regulatory Constraints Through Financial Risk Management

Marcel Boyer (), M. Martin Boyer () and René Garcia ()

Quarterly Journal of Finance (QJF), 2013, vol. 03, issue 02, 1-39

Abstract: Seeing the firm as a nexus of activities and projects, we propose a characterization of the firm where variations in the market price of risk should induce adjustments in the firm's portfolio of projects. In a setting where managers disagree with respect to what investment maximizes value, changing the portfolio of projects generates coordination costs. We then propose a new role for financial risk management based on the idea that the use of financial derivatives reduces coordination costs by moving the organization's expected cash flows and risks toward a point where coordination in favor of real changes is easier to achieve. We find empirical support for this new rationale for the use of financial derivatives, after controlling for the traditional variables explaining the need for financial risk management.

Keywords: Risk management; firm value; coordination problems; hedging; value at risk; JEL Classifications: G32; JEL Classifications: D2; JEL Classifications: L2 (search for similar items in EconPapers)
Date: 2013
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Working Paper: Alleviating Coordination Problems and Regulatory Constraints through Financial Risk Management (2011) Downloads
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DOI: 10.1142/S2010139213500092

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