Corporate Risk Management: Costs and Benefits

This paper establishes a framework within which the costs and the benefits of corporate risk management decisions can be analyzed. The most important conclusion is that risk management strategies should be pursued to enhance shareholder value. Although systematic hedging of all variation in the net cashflows may be in the best interest of the management, such behavior is inconsistent with maximizing firm and shareholder value. The extant empirical evidence cited is supportive of the notion that the strongest motive for risk management behavior is the avoidance of financial distress. However, there are offsetting costs to consider as well. The existence of these costs makes it imperative that shareholders understand the risk management process