Choice of Corporate Risk Management Tools under Moral Hazard

Jan Bena

FMG Discussion Papers from Financial Markets Group

Abstract: This paper examines the choice of tools for managing a firm’s operational risks: cash reserves, insurance contracts, and financial assets under an optimal financing contract that solves moral hazard between insiders and outside investors. Risk management is valuable as it reduces the costs of raising external financing, increases debt capacity, lessens underinvestment, and improves welfare. I show that insurance is superior as it facilitates the outside financing relationship but leads to inefficient excessive continuation if used without coverage limits. When insurance against an operational risk is not available, the firm uses financial assets instead or resorts to holding cash reserves.

Date: 2006-06
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-fin, nep-fmk, nep-ias and nep-rmg
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Related works:
Working Paper: Choice of Corporate Risk Management Tools under Moral Hazard (2006)
Working Paper: Choice of corporate risk management tools under moral hazard (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:fmg:fmgdps:dp566

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