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Corporate Risks (corporate + risk)

Distribution by Scientific Domains
Business, Economics, Finance and Accounting100%

Selected Abstracts

Stock Options and the Corporate Demand for Insurance

JOURNAL OF RISK AND INSURANCE, Issue 2 2006
Li-Ming Han
This article shows that a corporate manager compensated in stock options makes corporate decisions to maximize stock option value. Overinvestment is a consequence if risk increases with investment. Facing the choice of hedging corporate risk with forward contracts on a stock market index fund and insuring pure risks the manager will choose the latter. Hedging with forwards reduces weight in both tails of corporate payoff distribution and thus reduces option value. Insuring pure risks reduces the weight in the left tail where the options are out-of-the-money and increases the weight in the right tail where the options are in-the-money; the effect is an increase in the option value. Insurance reduces the overinvestment problem but no level of insurance coverage can reduce investment to that which maximizes the shareholder value. [source]

A reexamination of corporate risks under shadow costs of incomplete information

INTERNATIONAL JOURNAL OF FINANCE & ECONOMICS, Issue 1 2001
Mondher Bellalah
G3; G31; G32; G33 Abstract The valuation of the firm and its assets has been done for a long time in the classic context of complete information. Several empirical tests of the main valuation methods reveal a divergence between theoretical prices and observed prices. These deviations might be explained by the standard assumptions of complete information. It is possible to introduce information uncertainty as done by Merton and by Bellalah in the reexamination of corporate risks in the presence of information costs. The concept of risk is useful in modelling the value of the firm and its business risk and in the definition of the required rates of return and the cost of capital of corporations. However, the main well-known results ignore information uncertainty as defined by Merton. Using the main results from the study of Modigliani and Miller and the implications of Merton's model, we give expressions for the cost of capital and the value of the firm's equity and debt in the presence of information costs. We reexamine the relationships between interrelated risks in the same context. We introduce information costs in the computation of the cost of capital and in the pricing of equity in an option framework. When there are no information costs, the main relationships reduce to the classic results in the literature. Copyright © 2001 John Wiley & Sons, Ltd. [source]

Enterprise Risk Management: Theory and Practice

JOURNAL OF APPLIED CORPORATE FINANCE, Issue 4 2006
Brian W. Nocco
The Chief Risk Officer of Nationwide Insurance teams up with a distinguished academic to discuss the benefits and challenges associated with the design and implementation of an enterprise risk management program. The authors begin by arguing that a carefully designed ERM program,one in which all material corporate risks are viewed and managed within a single framework,can be a source of long-run competitive advantage and value through its effects at both a "macro" or company-wide level and a "micro" or business-unit level. At the macro level, ERM enables senior management to identify, measure, and limit to acceptable levels the net exposures faced by the firm. By managing such exposures mainly with the idea of cushioning downside outcomes and protecting the firm's credit rating, ERM helps maintain the firm's access to capital and other resources necessary to implement its strategy and business plan. At the micro level, ERM adds value by ensuring that all material risks are "owned," and risk-return tradeoffs carefully evaluated, by operating managers and employees throughout the firm. To this end, business unit managers at Nationwide are required to provide information about major risks associated with all new capital projects,information that can then used by senior management to evaluate the marginal impact of the projects on the firm's total risk. And to encourage operating managers to focus on the risk-return tradeoffs in their own businesses, Nationwide's periodic performance evaluations of its business units attempt to refl ect their contributions to total risk by assigning risk-adjusted levels of "imputed" capital on which project managers are expected to earn adequate returns. The second, and by far the larger, part of the article provides an extensive guide to the process and major challenges that arise when implementing ERM, along with an account of Nationwide's approach to dealing with them. Among other issues, the authors discuss how a company should assess its risk "appetite," measure how much risk it is bearing, and decide which risks to retain and which to transfer to others. Consistent with the principle of comparative advantage it uses to guide such decisions, Nationwide attempts to limit "non-core" exposures, such as interest rate and equity risk, thereby enlarging the firm's capacity to bear the "information-intensive, insurance- specific" risks at the core of its business and competencies. [source]