A View Inside Corporate Risk Management. This Draft: November 18, 2014

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "A View Inside Corporate Risk Management. This Draft: November 18, 2014"

Transcription

1 A View Inside Corporate Risk Management This Draft: vember 18, 2014

2 Introduction Why do firms hedge? It is very difficult to answer this basic question. Traditional economic theory suggests that firms rely on risk management to mitigate financial constraints or other market frictions due to informational asymmetries or agency problems. Yet, across the world, large, rated, dividend paying firms (arguably firms that are less affected by market imperfections) are significantly more likely to hedge than their small, unrated, non dividend paying counterparts (see Figure 1). 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 76% 63% 62% Sample Average: 52% 41% 42% 40% Large: vs. Rated: vs. Dividend Payer: vs. Figure 1 Risk Management and Firm Characteristics This figure reports the percentage of firms with a risk management program in place. The data are from our Corporate Risk Management Survey, which was conducted in the first quarter of The presented sample includes non financial firms from around the globe. Firms are defined as Large: if their sales are above $1 billion, Rated: if they have a credit rating for their debt, and Dividend Payer: if they pay regular dividends. These simple empirical facts motivate the central questions of our paper: What explains the wide variation in risk management practices across firms, and are these explanations captured by extant theories of risk management? The limited availability of data on corporate risk management has presented a major challenge to answering these questions. To assess current models of risk management, the empiricist needs detailed data on the firm s propensity to hedge, the extent of risk management, the motivation for hedging, the role played by executives in the decision to set up the risk management program, and managerial characteristics including executives attitudes towards risk. At an even more basic level, one also needs to identify whether the firm is facing any material hedgeable risks. This type of information is not available in standard archival data sources (such as COMPUSTAT), which only collect data on observed outcomes as recorded in annual reports or other corporate documents. To mitigate these limitations, we gather information from 681 CFOs from around the world. In this 2010 survey, we ask CFOs whether their companies have a risk management program in place, 1 their inside views on their firms growth prospects, and their views of the interconnected roles played by lines of credit and cash in hedging and liquidity management. We also ask the CFOs to reveal the motivations behind why their firms do (or do not) hedge; that is, we ask them to answer the central questions of our paper. For instance, we ask the CFOs about the extent to which risk management is 1 Throughout the study we use risk management and hedging interchangeably. 1

3 used as an instrument to reduce cash flow volatility or whether accounting standards might limit their firms usage of hedging instruments. We use the firm s ex ante hedging motivation to study the relation between market frictions (credit rationing, information asymmetry, or agency problems) and the firm s decision to hedge. There is an important advantage to studying hedging intentions rather than ex post hedge outcomes. A firm might intend to hedge but due to (potentially) extraordinary economic circumstances, not follow through on their intentions. We observe the intentions or ex ante plans, which should not be contaminated by ex post factors that impact the execution of risk management. By asking about motivations for hedging, our goal is to shed light on the relation between the type of frictions that the firm faces and the role of risk management in mitigating these frictions. In addition to evaluating existing theories, we administer a psychometric test to gauge managerial risk aversion. We combine this information with demographic data on executive characteristics related to compensation, age, experience, and education. This allows us to study the nexus between personal risk aversion and corporate risk management decisions. To our knowledge, ours is the first paper to empirically examine the link between personal risk aversion and corporate risk management. While the survey method can be used to gather unique information, there are limitations to any survey data based study. For instance, it is possible that the sample of respondents is not representative of the underlying population. Similarly, it is possible that some of the questions are misunderstood or otherwise produce noisy measures of risk management decisions, firm characteristics, or managerial traits. In addition, when interpreting field studies, one needs to consider that market participants do not necessarily have to understand the reason they do what they do in order to make (close to) optimal decisions. Finally, we are limited to a single cross section of firms. As a result, we cannot make any causal inference. To alleviate some of these concerns, we consulted with design experts, conducted focus groups, and performed beta tests in an attempt to minimize ambiguity in the questions. Further, we confirm that our sample is representative of data from standard archival databases in terms of basic demographics related to size, dividends, profitability, leverage, and cash holdings. While these findings are reassuring, they do not eliminate all the concerns about survey based research. To recap, our global survey is well suited to study why firms hedge. There are, however, limitations with this approach. In this sense, our approach complements existing empirical papers (such as Tufano, 1996; or more recently, Rampini, Sufi, and Viswanathan, 2014) that study risk management practices using detailed data for a limited number of firms from one industry. We find that 52% of the firms in our sample have a formal risk management program in place. 2 Our analysis also shows that there is significant variation in risk management practice across regions and ownership forms (e.g., 74% of public companies have a risk management program versus 39% of private firms). These differences persist when we control for firm characteristics such as size. We use information on the propensity to hedge to test existing theories of risk management. To the extent that large, rated, dividend paying companies are less financially constrained than their small, unrated, non dividend paying counterparts, evidence like that in Figure 1 is inconsistent with the 2 Bodnar et al. (2013) detail the results on many different types of risk management: credit risk, interest rate risk, foreign exchange risk, commodity risk, and geopolitical risk management. 2

4 credit rationing prediction that constrained firms hedge more (Froot, Scharfstein, and Stein, 1993). Importantly, we find that these patterns persist even if we focus on companies with high growth prospects, those more concerned with the effects of financial constraints on their ability to fund future investment. Theory also predicts that companies may substitute credit lines or cash holdings for risk management to deal with cash flow shortfalls (Froot, Scharfstein, and Stein, 1993; and Holmström and Tirole, 2000). If financially constrained companies were more likely to have access to credit lines or had more cash, this could explain why they are less likely to hedge. However, we find that based on our proxies financially constrained (small, unrated, non dividend paying) firms are significantly less likely to have a risk management program (than their unconstrained counterparts), even after we control for access to credit lines or the availability of cash. 3 Other studies have argued that economies of scale associated with setting up a risk management program (e.g., Mian, 1996; Bodnar, Hayt, and Marston, 1998) could explain why we do not find support for the credit rationing hypothesis. That is, while smaller firms might benefit from hedging, they often lack the scale to set up a risk management program or they may lack the financial expertise to use sophisticated financial instruments such as derivatives. To deal with this concern, we rely on a testing strategy that bypasses the effect of economies of scale. An important part of the credit rationing argument is that financially constrained companies hedge to reduce cash flow volatility. Thus, in this part of our analysis we focus only on firms with a risk management program in place and ask their CFOs to give us a qualitative assessment of the importance of risk management as a tool to reduce cash flow volatility. We find that CFOs indicate that reducing the volatility of cash flows is an important reason to implement a risk management program. However, we do not find that the desire to reduce the volatility of cash flows is more important for financially constrained firms; therefore, we do not find support for a key feature of the credit rationing hypothesis. The finding that, across the board, firms consider risk management an important tool to reduce cash flow volatility is consistent with Smith and Stulz (1985) and Stulz (2013). These authors argue that, independent from financial constraints, firms will hedge if their unhedged risks are sufficiently large that they could potentially lead to financial distress and undermine the very existence of the firm. That is, firms have incentive to hedge downside risk to reduced expected costs of financial distress. To the extent that small firms face higher information asymmetry, our finding that small firms are less likely to establish a risk management program (regardless of whether they have promising investment prospects) is also inconsistent with information asymmetry models of risk management such as DeMarzo and Duffie (1995). Their model predicts that managers rely on risk management to signal private information about the investment prospects of the firm. Rampini and Viswanathan (2010, 2013) build a model that explains why financially constrained firms hedge less than unconstrained firms. They argue that financially constrained (e.g., small) companies are less likely to hedge because they focus their resources directly on investment rather than hedging. Specifically, they model a collateral constraint as the friction that leads to financially 3 While these metrics are routinely used in empirical studies to assess financial constraints, they do not unambiguously identify whether a firm faces financial constraints. For example, a firm could be small but have large cash holdings, in which case it might be unclear whether to categorize the firm as financially constrained. For this reason, in our analysis we also partition the financially constrained firms on the basis of their cash holdings. 3

5 constrained firms hedging less. The collateral channel affects hedging as follows: Lenders require that firms pledge collateral to borrow and therefore, because they use collateral to borrow (and fund investment), these constrained firms lack the additional collateral that is required by hedging counterparties. Consistent with the models of Rampini and Viswanathan (2010, 2013) and previous empirical work (e.g., Nance, Smith, and Smithson, 1993; Mian, 1996; and Geczy, Minton, and Schrand, 1997), we find that financially constrained companies are less likely to hedge (see our Figure 1). Like Rampini and Viswanathan, we also find that the propensity to hedge increases with net worth. As to whether the collateral channel is the root cause of these effects, our evidence is inconclusive (with coefficients often having the correct sign but being insignificant). Relatedly, we do not detect a significant hedging role for cash holdings, even though cash is likely the primary form of hedging collateral (e.g., the International Swaps and Derivatives Association (ISDA) reports that in 2009 cash was the primary form of collateral for about 95% of OTC derivatives that might be used to hedge). 4 Moreover, we do not find a significant link between hedging and investment prospects. Next we study the human element of corporate risk management. Aside from Stulz (1984) and Smith and Stulz (1985), the human element is not explicitly considered in most theories of risk management and is also understudied empirically. We find that more risk averse managers are more likely to work at firms that have established a risk management program. Furthermore, we find that the effects of personal risk aversion vary conditional on other personal characteristics of the risk manager: Compensation, age, experience, and education. These findings are consistent with a core argument in cognitive psychology and economics that personal traits and aspects of human experience can alter the effect of manager risk aversion on corporate policies (e.g., Johnson and Tversky, 1983; Slovic, 1987). Recent finance theory has also embraced the implications of this argument for corporate decisions (e.g., Gervais, Heaton, and Odean, 2011; Palomino and Sadrieh, 2011). Our analysis suggests that ignoring the role of the individual manager might in part explain the limited ability of risk management theories to explain why firms hedge. To recap, we provide new insights regarding why firms hedge and test the predictions of modern risk management theories. Our results are consistent with aspects of some theories but inconsistent with others. 5 Importantly, our survey allows us to go beyond traditional predictions and allows us to examine the link between personal risk aversion, managerial traits, and corporate risk management decisions. Our analysis suggests that the human factor executive risk aversion in combination with personal characteristics related to compensation, age, experience, and education plays a crucial role in corporate risk management decisions. Future research could benefit from incorporating this important human element into risk management models. The paper is organized as follows. The next section provides a review of risk management theories and summarizes the empirical predictions. We review the empirical literature in the appendix. We describe the survey data in Section 2. Section 3 presents our findings. The final section offers some conclusions. 4 ISDA reports very similar figures for the years We discuss how our findings relate to previous empirical work in the appendix. 4

6 1. Theories of Risk Management 1.1. The Neoclassical View of Risk Management In the absence of transaction costs and other frictions, hedging can affect the variability of cash flows but not necessarily their expected value. In this case, risk neutral firms do not need to hedge because shareholders can hedge on their own without incurring any additional costs. This is known as the neoclassical view of risk management and is based on the same assumptions as Modigliani and Miller (1958). Several theories of risk management have been developed over the last 30 years. These theories depart from the neoclassical view by considering the effect of credit frictions and other market imperfections on the firm s decision to hedge. We summarize the key insights from these theories in the following subsections. To shorten the exposition, we review some of the main empirical studies in the appendix, where we also highlight when the empirical predictions from risk management models are not fully testable with archival data The Credit Rationing Hypothesis of Risk Management One of the classic motivations for corporate risk management is the necessity to mitigate the effects of credit rationing on the firm s ability to invest. This is known as the credit rationing hypothesis of risk management (Froot, Scharfstein, and Stein, 1993; Holmström and Tirole, 2000). 6 Risk management helps mitigate the effects of credit rationing because it reduces the volatility of cash flows that can be used to fund new investment projects in states when access to credit is limited or very costly. Froot, Scharfstein, and Stein (1993) and Holmström and Tirole (2000) also argue that prearranged lines of credit can function as a substitute for risk management in mitigating credit rationing. They argue that if companies have access to a credit line, they will be less compelled to rely on hedging as a tool to mitigate credit rationing because they could draw down from the credit facility to cover cash flow shortfalls. We examine three empirical predictions related to the credit rationing hypothesis. The first prediction is that firms are more likely to hedge if they face credit rationing. Given that the importance of risk management as an instrument to mitigate financial constraints is related to the firm s need to fund future investment, the hypothesis also predicts that credit rationed companies are more likely to rely on risk management if they have significant investment prospects that need funding. A related effect is that the survey responses of financially constrained firms should rank reduce the volatility of cash flows by hedging as more important compared to financially unconstrained firms. The third prediction is that companies hedge more if they do not have access to credit lines (or cash). Our data are well suited to test the predictions from the credit rationing hypothesis of risk management. We have information on the insiders views about the investment prospects of the firm, the degree of financial constraints, whether the firm has access to large credit lines or cash balances, and why the firm hedges. 6 Mello and Parsons (2000) develop a dynamic model to show that hedging mitigates financial constraints by reducing the costs of financial distress and increasing financial flexibility. 5

7 Financial Constraints, Access to Collateral and Hedging Rampini and Viswanathan (2010, 2013) build a model that explains why financially constrained (e.g., small, non dividend paying, unrated) firms hedge less than their unconstrained counterparts. In their model, the friction of limited availability of collateral leads to financially constrained firms hedging less. Financially constrained companies face a tradeoff. They can pledge collateral to lenders to borrow so they can increase (or maintain) spending on valuable capital and labor, or they can pledge collateral to hedging counterparties to set up a risk management program (e.g., a hedging program based on over the counter forward contracts). This tradeoff implies that when the firm needs to fund a new investment project, the financing need prevails over the hedging concern. Thus, all else equal, we should expect financially constrained firms with low collateral capacity to be less likely to hedge relative to financially constrained companies with high collateral capacity. We should also expect these patterns to be stronger for firms with good investment prospects. Testing the effects of the collateral channel is complicated by the difficulty of obtaining good measures of the amount of collateral usable in hedging agreements and of the companies growth prospects (e.g., Rampini, Sufi, and Viswanathan, 2014). In our study, we ask CFOs whether the size of cash holdings would influence the intensity of risk management activities at their firms. Similarly, rather than using market based measures to assess growth prospects, we directly ask CFOs to give us their personal views on the investment prospects for their firms. The richness of our data allows us to study the collateral channel of risk management in a way that is not possible with the ex post archival databases commonly used in risk management studies Risk Management and Agency Problems The key assumption of the agency models of risk management is that managers are risk averse (Smith and Stulz, 1985; Holmström and Ricart i Costa, 1986). This is an important difference from the other neoclassical theories of risk management, which assume that managers are aligned with shareholders and act as risk neutral agents. However, agency models of risk management do not explicitly account for heterogeneity in the degree of risk aversion across managers. The assumption of managerial risk aversion has important implications for risk management. Given that managerial claims to the firm are not easily diversifiable, risk averse managers can reduce the effect of the non diversifiable risk of their claims by hedging, even when this decision is not valuemaximizing from the perspective of well diversified shareholders. (For example, executives in the oil industry could reduce their personal exposure to oil price fluctuations by selling oil price forward contracts as a part of their firm s hedging program). The first prediction is that firms in which risk averse managers have a relatively large share of their wealth invested in their firm s shares will be more likely to manage risk to reduce the effect of low diversification. Relatedly, holding constant the percentage of their wealth invested in their firm s shares, more risk averse executives are more likely to manage risk. 7 7 Risk management has also implications for debt capacity. If hedging reduces the variability of expected cash flows, then all else equal lenders should be willing to provide more financing to firms with a risk management program in place (Mayers and Smith, 1982; Smith and Stulz, 1985; Leland, 1998; Graham and Rogers, 2002). 6

8 In our survey, we estimate managerial attitude towards risk using a psychometric test design following Graham, Harvey, and Puri (2013). This allows us to test the predictions from agency models of risk management using a direct measure of managerial risk aversion. Importantly, we go beyond solely testing the effect of personal risk aversion on corporate risk management. Building on recent developments in cognitive psychology and economics, recent finance theory (e.g., Gervais, Heaton, and Odean, 2011; Palomino and Sadrieh, 2011) embraces the argument that personal traits and aspects of personal experience can modify the effect of risk aversion on corporate policy. For example, high underlying CFO risk aversion may by itself lead to more corporate hedging; however, the pure risk aversion effect might be attenuated among CFOs who are highly educated or very experienced because of their familiarity with the instruments that are used to hedge and their ability to make accurate predictions of the future during difficult circumstances. We are able to gather detailed information on managerial risk aversion and other personal characteristics related to compensation structure, age, experience, and education. This allows us to study whether the effect of personal risk aversion on corporate risk management changes in relation to other personal characteristics Information Asymmetry and Risk Management Breeden and Viswanathan (1999), DeMarzo and Duffie (1991, 1995), and Raposo (1997) argue that when it is difficult for non controlling shareholders (outsiders) to assess the quality of the management, higher quality managers can signal their type by hedging. The premise of their argument is that firm performance depends on managerial ability and other contingencies that are not directly controllable by management (e.g., currency fluctuations). In the presence of information asymmetry, outsiders cannot separate managerial ability from external contingencies. Higher ability managers hedge to mitigate the effect of hedgeable risks on firm performance and signal their type. Lower ability managers do not hedge because having a risk management program is costly. The main prediction from this signaling argument is that firms are more likely to install a risk management program when information asymmetry is high Testing the Theories Table 1 presents a summary of the main empirical predictions from the current theories of risk management. Empirical evidence related to the predictions from existing models is limited (see the Appendix). 7

9 Table 1 Theories of Risk Management: Summary of Empirical Predictions Theories Main theory reference Key assumptions Role of managerial risk aversion Main predictions Testable w/archival data Testable w/ survey data Neoclassical View Modigliani and Miller (1958) Absence of frictions risk management Credit Rationing Froot, Scharfstein, and Stein (1993) Credit rationing; firm is risk neutral 1. Risk management more likely by credit rationed firms 2. Risk management more likely by credit rationed/growth firms Partially 2.1. Risk management more likely to reduce cash flow volatility by credit rationed/growth firms 3. Risk management more likely by firms w/out credit line Partially Access to Collateral Rampini and Viswanathan (2010, 2013) Credit rationing; limited collateral; firm is risk neutral Risk management more likely by credit rationed/growth firms w/ plentiful collateral Agency Problems Smith and Stulz (1985) Shareholder manager; shareholder bondholder conflicts; firm is risk neutral 1. Risk management more likely if risk averse manager has large stock ownership Partially 2. Risk management more likely if manager risk aversion is high (holding stock ownership constant) Information Asymmetry DeMarzo and Duffie (1995) Managerial ability unobservable; firm is risk neutral Risk management more likely by high quality firms, when information asymmetry is higher Partially 2. Data 2.1. The Data Gathering Process To obtain our data, we contacted members of the Duke CFO Magazine Survey panel, the International Swaps and Derivatives Association (ISDA), and the Global Association of Risk Professionals (GARP). We invited CFOs to take part in the survey via in the last week of February Reminder s were sent out throughout March The survey closed at the end of April We sent out about 29,000 invitations to non financial companies in rth America, Europe, Asia, and other regions (including Australia, New Zealand, Latin America, the Middle East, and Africa). In total, we gathered 681 responses (from both public and private companies), which, to our knowledge constitutes the largest survey sample on risk management assembled to date. The response rate is 2.5% which seems low. However, the response rate is misleading. We are interested in surveying only the officers with detailed knowledge or who are in charge of risk management. Many of the ed organizations, particularly for GARP and ISDA, had a very low proportion of 8

10 senior financial officers. In the end, our sample includes only senior financial officers and key risk managers. We refer to the survey sample as CFOs though some have titles such as Treasurer, Vice President of Finance, or Chief Risk Officer. We ask CFOs about their companies risk management practices and demographics, including sales, credit ratings, dividend policies, investment prospects, and several other characteristics. We also collect information about risk aversion and other personal traits. We use this information below to study the nexus between personal risk aversion and corporate risk management decisions Descriptive Statistics Table 2 reports descriptive statistics for the firms in our sample. About 52% of the companies report having a risk management program (Risk Management indicator variable). 8 Table 2 also shows significant regional variation in risk management practices. Risk management also varies significantly with respect to ownership form: 74% of the public companies have a risk management program compared to 39% of the private companies. 9 In our regressions, we control for these sources of heterogeneity by including region and ownership form dummies. Table 2 also reports descriptive statistics for several measures of firm characteristics. About 30% of the firms have revenues above $1 billion (Large). There is also some demographic variation across regions and ownership form. For instance, 15% of the Asian firms are classified as Large, compared to 35% and 42% of the rth American and European companies, respectively. We also report summary statistics on dividend policy, investment prospects, leverage, and whether the firm has a credit rating. [Table 2 Here] Table 2 shows that 36% of the firms are public, which indicates that our sample has a good balance of public and private companies. The table also provides information on the distribution of the sample across regions for the firms for which headquarters information is not missing. 53% of the firms in the sample are from rth America, 18% are from Europe, and 25% are from Asia. The remaining 4% of companies (25 observations) are headquartered in Australia, New Zealand, Latin America, the Middle East, and Africa. We categorize these companies as Other Region firms Comparing the Survey Sample to COMPUSTAT Table 3 compares our sample of public firms with data from the COMPUSTAT Global database (which only includes public firms). This allows us to assess whether our sample characteristics are similar to 8 All our findings are qualitatively very similar (albeit in some cases with lower statistical power) if we replace the Risk Management indicator variable with an indicator for whether the firm actively uses derivative instruments to manage financial risk (foreign exchange rate, interest rate, and commodity risk). 9 Overall, our risk management summary statistics align closely to those reported by previous studies. In a similar survey setting, Bodnar, Hayt, and Marston (1998) find that 50% of the firms in their sample hedge. Bartram, Brown, and Minton (2010) find that in a sample of public listed firms located for two thirds in rth America, 66% hedge. Our survey data show that 74% of the public companies have a risk management program. If we restrict the sample to public firms in rth America, the percentage of firms with a risk management program goes down to 67% (which is very close to the 66% in Bartram, Brown, and Minton, 2010). 9

11 standard databases used in corporate finance research. There are 244 non financial publicly listed firms in our survey sample, which we compare with a sample of about 22,700 non financial companies in COMPUSTAT with a fiscal year ending in May 2010 or the 11 months prior. [Table 3 Here] The evidence in Table 3 suggests that our sample is broadly comparable to the COMPUSTAT sample. About 45% of firms have annual sales of less than $1 billion ( small ) in our public sample versus 52% in COMPUSTAT. Our data indicate that about 33% of the survey firms do not pay dividends regularly, relative to 24% of the companies in Global COMPUSTAT. 10 The two samples are quite similar in terms of profitability. 3. Results 3.1. Why Firms Hedge We ask CFOs why their firms do (or do not) have a risk management program in place. We explore how risk management objectives relate to cash flow variability, access and cost of finance (debt and equity), ratings, firm value, and decision making. We tailor the questions to the theories of risk management that we test in this study. For example, the credit rationing hypothesis of risk management predicts that firms hedge to reduce the volatility of cash flows that can be used to fund new investment projects when they are financially constrained and funding access is limited. Therefore, it is important to know whether firms value risk management as a tool to reduce the volatility of cash flows, improve access to finance, and to enable investments, all conditional on the degree of financial constraints. Figure 2 summarizes the factors that CFOs rank as important or very important (a 3 or 4 respectively, on a scale from 1 to 4). The primary factors include a desire for lower unexpected losses, as well as decreased volatility and surprises. More than 80% of the CFOs in our sample say that Increase Expected Cash Flows and Decrease Unexpected Losses are important determinants of risk management policies. Relatedly, about 80% (75%) of the CFOs say that Reduce Cash Flow Volatility ( Improve Earnings Predictability ) is an important determinant of risk management. Overall, these findings suggest that predictability of cash flows and earnings are among the main reasons that firms hedge. [Figure 2 Here] Other factors also play an important role in corporate hedging decisions. For example, of the firms with credit ratings, almost 75% use hedging to Increase/Maintain Ratings. Given its importance in the theoretical risk management literature, it is worth noting that Improve Investment in Difficult Times is important, but less so than the reasons listed above. About two thirds of CFOs indicate that this investment based motive to hedge is important or very important. As Figure 2 shows, other factors such as decreasing the cost of equity or share price volatility are less important. In unreported tests, we find, for example, that earnings predictability/smoothing are significant determinants of why public firms hedge more than private firms. To the extent that public firms are 10 For U.S. firms in COMPUSTAT, the percentage of non dividend paying firms is about 70%. For rth America firms in our sample, the percentage of non dividend paying firms is 52%. 10

12 more compelled to hit earnings targets and they hedge to increase the predictability of earnings, these findings suggest that accounting considerations (e.g., whether a financial instrument qualifies for hedge accounting) might play a role in explaining hedging. In the following sections, we tie the CFOs responses to formal tests of risk management theories. While the predictions from some of these theories are intuitive, the empirical evidence does not always indicate that they play a primary role in explaining corporate risk management in practice. We also provide evidence on interactions between various theoretical influences on hedging. For instance, one theory predicts that financially constrained firms cannot hedge because they are required by lenders to pledge collateral to borrow and lack the additional collateral that is needed to enter into a hedging agreement. However, another theory predicts that hedging can increase debt capacity of financially constrained firms by reducing the volatility of their cash flows. The interplay of these channels is not part of any existing model. Therefore, it is important to test the relation between these channels empirically Why Firms Do t Hedge: The Role of Accounting Standards The accounting literature shows that managers have strong incentives to manage earnings. Earnings smoothing can be produced via accounting choices or real business decisions (such as the timing of capital projects, research and development, advertising and the decision to hedge). 11 There is an open debate as to whether accounting standards impede firm s usage of derivatives for hedging (see, e.g. Zhang, 2009). Our paper provides new insight on this issue. Hedge accounting is regulated under the International Accounting Standards (IAS) 39 (or the corresponding Financial Accounting Standards (FAS) 133 in the U.S.). Through hedge accounting, firms can offset the profit and loss volatility in the derivatives (arising from marking to market the derivatives) with the reciprocal profits and losses in the hedges. The most stringent requirement for hedge accounting to be applicable is for the hedging firm to show that there is an offsetting relation between the value of the derivatives and the value of the hedged item ( hedge effectiveness tests 12 ), and that the offset is not the mere consequence of chance. Yet, this is often difficult to prove in practice because the derivative instrument and the hedged item often do not match in terms of commodity type, notional amounts, payment dates, and other basic terms. The accounting treatment of derivatives as well as regulatory requirements may provide a strong disincentive for hedging. In our survey, we ask CFOs to tell us whether the hedge effectiveness tests mandated by IAS39 or FAS133 have led to changes in the intensity of corporate hedging with derivatives. In unreported results, we find that 19% of firms with a risk management program 11 Graham, Harvey, and Rajgopal (2005) find that managers have a preference for using real actions (like capital investment) to smooth earnings rather than accounting choices. 12 For example, consider the case of an airline entering a long futures contract to hedge against a possible increase in the price of jet fuel. Assume also that the minimum notional amount for standard futures contracts is 1 million gallons of jet fuel. Consider two scenarios: (1) The firm needs to hedge 1 million gallons; (2) The firm needs to hedge 500,000 gallons. If the fuel price decreases, marking to market the derivative requires the airline to report a loss. However, if the notional amount of the futures contract matches the firm s need for hedging as in (1), the firm meets the hedge effectiveness tests mandated by IAS39 or FAS133 and can offset the loss on the derivatives with the profit arising from a lower market price of jet fuel. On the other hand, the firm does not meet the hedge effectiveness tests in scenario (2) and must report the loss on the derivatives in the income statement without being able to offset it. 11

13 reduced the use of derivatives as a result of these regulations. Moreover, we find that 23% of public firms (versus 12% of private firms) respond to this hedging disincentive, indicating that public firms are more concerned about the possible adverse effect that the accounting treatment of derivatives use might have on earnings. 13 In the analysis that follows, we relate the CFOs descriptions of why firms hedge (or do not hedge) to both firm level characteristics and modern theories of risk management Evidence on the Credit Rationing and Information Asymmetry Models of Risk Management The credit rationing hypothesis of risk management predicts that the probability of risk management increases with financial constraints and investment growth prospects. To begin our credit rationing analysis, we categorize firms as financially constrained if their sales are below $1 billion, their public debt is unrated, or they do not pay dividends regularly. We follow the literature in this conditioning. 14 We classify firms as high (low) investment prospect firms if the CFO rates their investment prospects above (below) the sample median. 15 Table 4 presents mean difference tests on the percentage of companies that have a risk management program in place conditional on financial constraints, investment prospects, and the combination of financial constraints and investment prospects. Panel A shows that a significantly lower percentage of financially constrained firms have a risk management program in place. For example, small firms are much less likely to have risk management programs in place relative to large companies (41% vs. 76%). Panel A also reports that companies in the high investment prospect group are more likely to manage risk relative to their low investment prospect counterparts (55% vs. 48%). However, this difference is not statistically significant. [Table 4 Here] The cross tabulations in Panel A shows that a significantly lower percentage of financially constrained firms have a risk management program relative to their unconstrained counterparts for both the high and the low investment prospect groups. For instance, we find that only 45% of small firms with high investment prospects have a risk management program in place, relative to 76% of the large companies with the same investment prospects. Overall, these findings show that a firm s propensity to hedge varies with financial constraints, not investment prospects. 13 In unreported tests, we find that earnings predictability/smoothing are significant determinants of why public firms hedge more than private firms. To the extent that public firms are more compelled to hit earnings targets and they hedge to increase the predictability of earnings, these findings suggest that accounting considerations (e.g., whether a financial instrument qualifies for hedge accounting) play a role in explaining hedging. 14 Gilchrist and Himmelberg (1995) and Fama and French (2002) argue that small firms are typically young, less well known, and therefore more exposed to credit frictions. The argument that rated companies are less likely to be financially constrained is proposed by Faulkender and Petersen (2006). Related approaches for characterizing financing constraints are used by Gilchrist and Himmelberg (1995) and Almeida, Campello, and Weisbach (2004). Fazzari, Hubbard, and Petersen (1988) argue that firms are more likely to pay dividends if they are less susceptible to credit rationing. 15 We obtain very similar results if we classify firms as high/low investment prospects according to whether the firms investment prospects are above/below median investment prospects for the industry. 12

14 Panel A also shows that financially constrained companies (small, no rating, no dividend) are somewhat more likely to establish a risk management program when their investment prospects are high, although the numbers are generally not statistically different from low investment prospect firms. For instance, we find that 45% of small firms with high investment prospects have a risk management program relative to 38% of low investment prospect firms. We do not find any patterns in the propensity to hedge across investment prospect groups for financially unconstrained firms. 16 Panels B and C show similar patterns in risk management practice (to those documented in Panel A for the full sample) for different subsamples based on ownership form (public and private companies). To sum up, the evidence in Table 4 shows that financially unconstrained firms (large, rated, dividend paying) are significantly more likely to have a risk management program in place relative to their constrained counterparts. These patterns are very similar for firms with either high or low investment prospects. tably, these findings are inconsistent with the key prediction of the credit rationing hypothesis that financially constrained firms hedge to mitigate the effect of limited access to credit. However, in partial support of the credit rationing hypothesis, we find that within the financially constrained categories, companies with high investment prospects are somewhat more likely to hedge, although differences are only statistically significant in one of three categorizations (dividend paying status). It should also be noted that Froot, Scharfstein, and Stein (1993) argue that, beyond describing what firms do, their theory has important prescriptive implications. In relation to our findings, this implies that there could be frictions that limit the ability of financially constrained firms to hedge, even though it could be theoretically optimal for them to do so. The evidence in Table 4 can also be used to evaluate a prediction from the information asymmetry models of risk management (DeMarzo and Duffie, 1995). To the extent that information asymmetry is higher for small (or unrated or non dividend paying) firms, theory predicts these firms to hedge more than their large firm counterparts. The evidence in Table 4 suggests the opposite. Likewise, we compare public and private firms. Brennan and Subrahmanyam (1995), Easley, O Hara, and Paperman (1998), and Hong, Lim, and Stein (2000) suggest that information asymmetry is lower for public firms because they are followed by analysts, so we might expect less public firm hedging. In unreported tests, we again find the opposite, even when controlling for investment opportunities and firm size. Overall, our results are inconsistent with information asymmetry predictions. 17 Overall, the evidence in Table 4 is inconsistent with the credit rationing hypothesis of risk management. Previous empirical studies have reported evidence consistent with ours (e.g., Nance, Smith, and Smithson, 1993; Geczy, Minton, and Schrand, 1997). We now focus on a specific channel of the credit rationing hypothesis: The link between risk management and cash flow volatility. The volatility of cash flows is at the core of the credit rationing hypothesis, which predicts that risk management helps financially constrained firms fund new investment opportunities by reducing the volatility of cash flows, helping the firm to fund investment via internal funds in states when external credit is rationed. We discuss tests related to this prediction in the remaining part of this section. In these tests, we focus exclusively on companies with a risk management program in place whose 16 In unreported tests, we find very similar evidence in a regression framework after controlling for firm heterogeneity and regional variation. 17 We acknowledge that this conclusion hinges on the accuracy of our measures of information asymmetry. If, for example, large firms are complex and complexity leads to more information asymmetry, our evidence would then be consistent with DeMarzo and Duffie (1995). 13

15 CFOs rate on a scale from 1 to 4 the importance of risk management as an instrument to decrease cash flow volatility. Figure 2 (discussed above) indicates that almost 80% of the CFOs say that reducing cash flow volatility is either important or very important for the decision to hedge. But does the importance of risk management as a tool to reduce cash flow volatility vary by financial constraints and investment prospects as predicted by the credit rationing hypothesis? To answer this question, Table 5 reports mean difference tests on Decrease Cash Flow Volatility by financial constraints, investment prospects, and the combination of financial constraints and investment prospects. Table 5 shows that the average unconditional response on Decrease Cash Flow Volatility is 3.01 on a scale from 1 to 4. Perhaps more interesting, we examine whether the importance of decreasing cash flow volatility varies with other key variables. We find that the importance of cash flow volatility does not vary in relation to financial constraints, investment prospects, or the combination of both financial constraints and investment prospects. For instance, the mean response is 3.11 for the companies in the large category relative to 3.06 for firms in the small category (row 1, columns 2 and 3) and the difference is not statistically different from zero. The mean response is 2.95 for companies in the high investment prospect group relative to 3.05 for firms in the low investment prospect group (column 1, rows 2 and 3). Similarly, the mean responses for high versus low investment prospect large firms, and the same comparison for small firms, 18 are not significantly different from each other. 19 [Table 5 Here] Altogether, the findings in Table 5 are not consistent with the predictions of the credit rationing hypothesis of risk management. Our evidence suggests that the importance of risk management as an instrument to reduce cash flow volatility is uncorrelated with financial constraints, investment prospects, or the combination of financial constraints and investment prospects. These findings are consistent with a pragmatic view of risk management whereby firms, independently from size, ratings, or dividend policy, need to hedge when they are facing risks that could cause financial distress and undermine the very existence of the firm (Stulz, 2013) Evidence on the Substitution between Risk Management, Credit Lines, and Cash Holdings Froot, Scharfstein, and Stein (1993) and Holmström and Tirole (2000) argue that lines of credit can function as a substitute for risk management in mitigating credit rationing. The implication of this argument for our tests is that if the majority of our financially constrained firms have access to untapped funds from credit lines, this could explain why we do not find (in Table 4) that financially constrained firms are more likely to rely on risk management. Table 6 presents tests related to this prediction. In Panel A, we report mean difference tests on the percentage of companies having a risk management program conditional on financial constraints, credit lines, and the combination of the two. To mitigate the concern that having access to a line of credit could depend on whether the firm is financially constrained, we focus exclusively on firms 18 We find very similar patterns if we partition the sample by continent (results available upon request). 19 As an alternative to Reduce Cash Flow Volatility, we ask CFOs to rate risk management as an instrument to Improve Earnings Predictability or Decrease Unexpected Losses and find patterns very similar to the ones documented in Table 5. 14

16 with a certain proportion of the credit line that is untapped (and only look at firms with access to a credit line). We categorize a firm as having a high ( low ) percentage of the credit line undrawn if the percentage of the credit line unutilized is above (below) the sample median. Arguably, firms with a high percentage of undrawn credit line are those that can substitute credit lines for risk management as predicted by the credit rationing hypothesis. As in previous tables, Panel A shows that a significantly lower percentage of financially constrained (small, unrated, non dividend paying) firms have a risk management program in place relative to their unconstrained counterparts. However, this relation does not appear to be driven by unused credit line capacity. In fact, opposite from the credit rationing prediction, within each financial constraint category, we find that firms with a high percentage of unused credit lines are generally more likely to have a risk management program in place (although differences are generally not statistically different from zero). For instance, 45% of the small firms with a high undrawn credit line capacity have a risk management program relative to 38% of the similar firms a low percentage undrawn. [Table 6 Here] The literature on liquidity management 20 also suggests that lines of credit and cash holdings might work as substitutes. Therefore, we reevaluate the evidence in Panel A by sorting companies on the basis on their cash holdings. We say that a firm has high ( low ) cash holdings if the ratio of cash and marketable securities to total assets is above (below) the sample median. The evidence in Panel B is very similar to the credit line findings in Panel A (i.e., opposite direction to the hypothesis but insignificant). For example, we find that 45% of the small firms with high cash holdings have a risk management program relative to 37% of the small companies with low cash holdings. Overall, we do not find evidence that unused credit line capacity or cash holdings affect whether firms have a risk management program The Role of Collateral We have shown above that financially constrained firms hedge less (rather than hedging more as predicted by the credit rationing hypothesis). Rampini and Viswanathan (2010, 2013) argue that this result is consistent with their model due to the friction of constrained firms having limited collateral and choosing to use that collateral to borrow (and invest) rather than as hedging collateral. In this part of our analysis we therefore focus on whether the observed financial constraint effects are driven by the collateral channel. ISDA (2009) reports that between 93% 98% of the collateral used for Over the Counter (OTC) derivatives is in the form of cash or cash like (government) securities. Given the frequency with which cash is used as collateral in hedging, we revisit the analysis in Panel B, Table 6 to discern the role played by cash (collateral) in hedging. 20 See Sufi (2009), Lins, Servaes, and Tufano (2010), and Campello, Giambona, Graham, and Harvey (2011). 21 Opler et al. (1999) find evidence that is consistent with the view that that cash and hedging are complements rather than substitutes. In contrast, Nance, Smith, and Smithson (1993) and Geczy, Minton, and Schrand (1997) find that cash holdings and hedging activities are negatively correlated. More recently, Bonaimé, Hankins, and Harford (2014) find that payout flexibility (i.e., favoring repurchases over dividends) and hedging are negatively correlated. 15

17 To the extent that our measure of cash holdings captures the availability of collateral to hedge, we would expect to find that high cash firms hedge more. Across each of our financial constraint proxies, the propensity to hedge is higher for the firms with more cash (collateral), consistent with the prediction of Rampini and Viswanathan. Yet, the differences are significant in only one of three categories (unrated firms). In unreported tests, we find very similar results for both high and low investment prospect firms. Overall, the evidence in Panel B that financially constrained companies are less likely to hedge is consistent with Rampini and Viswanathan (2010, 2013). However, the statistical evidence in our analysis is weak that the effects of financial constraints are driven by limited access to collateral (when collateral is measured by the most common form of collateral: cash and marketable securities). In addition to examining the existence of a risk management program, we also ask CFOs whether the intensity of risk management would change if access to cash holdings were high. For 77% of CFOs, increased access to cash either has no impact on the intensity of their hedging or leads to a decrease in hedging intensity. Relatedly, we do not find significant evidence that the effects of cash holdings depend on financial constraints or investment prospects. We also examine the role of cash collateral using archival data. As mentioned, while cash is an imperfect proxy for collateral, 22 in practice, it is the dominant form of collateral. 23 We focus on hedging intensity in the airline industry. Our analysis confirms the evidence in Rampini, Sufi, and Viswanathan (2014) that net worth is positively correlated with hedging. As above, we also find that the coefficient on cash (included as a proxy for available collateral) is positive as predicted but again it is insignificant. 24 This is consistent with the results in our overall survey sample (as reported above) Risk Aversion, Executive Characteristics, and Risk Management Measuring Risk Aversion To our knowledge, our survey contains for the first time a direct measure of risk aversion of risk managers. Following Barsky, Kimball, Juster, and Shapiro (1997), our questions involve choices over lifetime income from labor. One approach might be to ask CFOs whether they would choose to stay in their current job or move to an attractive new position. Barsky et al. warn that such a question might lead to a status quo bias in which individuals might choose the current job over the risky alternative because changing jobs is costly and not because they are risk averse. Our question design mitigates this problem. 25 In the questionnaire, we ask the CFOs to choose between two new jobs. Graham, Harvey, and Puri (2013) use this expedient to mitigate the status quo bias. We ask the CFOs the following sequence of questions: 22 For example, one constrained company might have low reported cash holdings but have the option to draw down a line of credit to produce cash when it is needed versus another constrained company that has already drawn down its credit line to increase its current cash holdings. 23 For example, we examined the annual reports for 23 airline firms in Cash is the only form of hedging collateral mentioned in any of the annual reports. (Nine airlines mention cash explicitly; the other 14 do not mention any form of collateral.) 24 We also find the coefficient on cash to be positive but insignificant for the transportation firms in our survey. 25 See Barsky, Kimball, Juster, and Shapiro (1997) and Graham, Harvey, and Puri (2013) for additional details on the design of questions aimed at measuring risk aversion. 16

18 Suppose you are the only income earner in your family. Your current income is $X. Your doctor recommends that you move because of allergies. Which of the following two job opportunities would you prefer? (1) 100% chance job pays $X for life; (2) 50% chance job pays $2X for life and 50% chance job pays $2/3 X for life. If the CFO chooses (1), then the respondent is asked to answer the following follow up question: Which of the following two job opportunities would you prefer? (3) 100% chance job pays $X for life; (4) 50% chance job pays $2X for life and 50% chance job pays $4/5 X for life. If the CFO chooses (2), then the respondent is asked to answer the following follow up question: Which of the following two job opportunities would you prefer? (5) 100% chance job pays $X for life; (6) 50% chance job pays $2X for life and 50% chance job pays $1/2 X for life. We categorize the CFOs that picked the sequence (1) and (3) as Highly Risk Averse, the CFOs that picked the sequence (1) and (4) as Moderately Risk Averse, and the CFOs that picked either the sequence (2) and (5) or (2) and (6) as Less Risk Averse. We combine our measures of managerial risk aversion with demographic data related to compensation, age, professional experience, and education. Table 7 shows that only 20% of the CFOs in our sample are Highly Risk Averse. Of the remaining group, 17% of the CFOs are Moderately Risk Averse, while a sizable 63% are Less Risk Averse. We find very similar patterns across rth America, Europe, and Asia. This finding suggests that a common trait of CFOs around the world is their tolerance of risk. Overall, the CFOs of public and private firms have similar risk tolerance: 32% of the CFOs of public firms are either highly or moderately risk averse, relative to 39% of the CFOs in private firms. [Table 7 Here] Our goal is to study the effect of risk aversion on hedging in relation to other personal characteristics. Therefore, it is important to discuss these characteristics before analyzing how they interplay with risk aversion in the risk management decision. Table 7 shows that CFOs in Europe and Asia are younger than executives in rth America and are less likely to be compensated with stocks and options. CFOs are comparable across regions in terms of years on the job and education. Almost 80% of the CFOs have been on the job for at least four years and more than 60% have an MBA or other master s degree. Executives in public firms are younger and more likely to be compensated with stocks and options than executives in private companies but are otherwise comparable in terms of job tenure and education The Effect of Risk Aversion and Executive Characteristics on the Risk Management Decision 17

19 We next examine the effect of managerial risk aversion on corporate risk management decisions. We also examine the interactive effects of compensation, age, experience, and education. The argument that other personal traits can modify the effect of risk aversion on corporate policies has been a source of considerable debate in cognitive psychology since the 1980s (e.g., Johnson and Tversky, 1983; Slovic, 1987), and has been recently embraced by finance theory (e.g., Gervais, Heaton, and Odean, 2011; Palomino and Sadrieh, 2011). We are not aware of any empirical studies that directly link executive risk aversion to corporate risk management. Perhaps this is not surprising given that good measures of managerial risk aversion are generally unavailable and data on managerial characteristics are difficult to obtain. 26 Crucially, this type of information is available from our survey. We use these data to estimate a probit model where the dependent variable is Risk Management (an indicator variable for firms with a risk management program), modeled as a function of control variables and our managerial risk aversion measure: Highly Risk Averse. The control variables include Large, Ratings, Dividend Payer, Investment Prospects, Profitable, Credit Line, Cash Holdings, Leverage, Public, and regional dummies (indicators for firms headquartered in Europe, Asia, and other regions, with the rth America firm indicator as the omitted indicator variable). We select our control variables in an attempt to hold constant the effects from other theories and important firm heterogeneity. All of our regressions are estimated with heteroskedasticity consistent errors clustered by region. Results from the estimation of the probit model are reported in Table 8. Column 1 reports results for the full sample. The key finding in column 1 is that the coefficient on Highly Risk Averse is positive and significant, indicating that risk averse executives are more likely to work at firms with a risk management program. The effect is economically important. The marginal effect of implies that companies with highly risk averse CFOs are 10.1% more likely (which is 19.5% [= 0.101/0.52] of the sample average Risk Management of 0.52) to have a risk management program in place, relative to their more risk tolerant counterparts. This economic effect is comparable to or larger than the marginal effects of most of the control variables in (1) (see Figure 3). For instance, it is comparable to the marginal effect of for Dividend Payer and almost three times bigger than the marginal effect of for Cash Holdings. Only Large and Public have larger marginal effects. We note that we are limited to a single cross section of firms. Thus, we do not interpret our findings in terms of causality. [Table 8 Here] [Figure 3 Here] We next analyze the effect of managerial risk aversion on corporate risk management conditional on other managerial traits. The first step is to sort firms into different groups based on compensation structure, age, professional experience, and education. We then re estimate our probit model for each group. Estimation results are reported in columns 2 9, Table 8. We find that the Highly Risk Averse indicator is positive and significant for the sample in which CFOs receive stocks and options as part of their compensation package (column 2). The effect is also economically very sizable. The marginal effect of implies that companies with highly risk 26 Tufano (1996) studies how managerial characteristics affect risk management decisions in the gold mining industry. See also Gay and Nam (1998) and Knopf, Nam, and Thornton (2002). However, these studies do not directly measure managerial risk aversion. 18

20 averse CFOs are 20.5% more likely (or 39% relative to the sample average Risk Management of 0.52) to have a risk management program in place. We do not find any effect of risk aversion on risk management among firms in which the CFO does not receive stock or options as part of the compensation package (column 3). To the extent that executive stocks and options can be used as a proxy for whether executives have a large stake of their wealth invested in the firm, the evidence in column 2 is consistent with agency models of risk management (i.e., Stulz, 1984; Smith and Stulz, 1985) that executives with a less diversified personal portfolio are more likely to act on their risk aversion by hedging. 27 These findings are also consistent with the argument in cognitive economics that the combination of personal risk aversion and other managerial traits has important implications for corporate decisions. For example, a manager who is very risk averse may choose a contract that consists of mainly fixed compensation (rather than variable) thereby modifying (reducing) the impact of the risk aversion on the way she performs her corporate duties. We also find that risk aversion is economically and statistically important for the risk management propensity of younger CFOs (less than 55 years old) and CFOs with MBAs. If young age and education are indicative of how exposed CFOs have been to innovative financial instruments, these findings are in line with cognitive models suggesting that younger and more educated executives could be more willing to engage in hedging because they are more likely to have been exposed (e.g., through education) to derivatives (Tufano, 1996). Thus, age and education modify the effects of risk aversion. We do not find any effect of risk aversion on risk management for the samples with older CFOs and CFOs without MBAs. Finally, we also find that risk aversion is important for the propensity to hedge among less experienced CFOs (four or less years on the job), but has no effect on the hedging practice of the more experienced CFOs. This combined finding suggests that experience can mitigate how humans react to their personal risk aversion. To the extent that less experienced CFOs are also younger, this finding is also consistent with the evidence discussed in the previous paragraph about younger CFOs. To recap, our analysis suggests that a manager s tolerance for risk is important for whether their organization manages risk. Our analysis also suggests that the channel through which risk attitude affects corporate policies interacts with personal traits related to compensation, age, experience, and education. In line with behavioral models (e.g., Johnson and Tversky, 1983; Slovic, 1987), these findings suggest that personal characteristics related to lifetime experience have implications for how people act on their degree of risk aversion. Surprisingly, the role of this human component has received limited attention in corporate risk management research, both theoretical and empirical. We hope our study will lead researchers to incorporate this important element in future research. 4. Conclusions 27 Agency models of risk management also predict that when compensated with stock options, executives may prefer not to hedge because higher stock price volatility has the effect of increasing the value of their stock options. However, our evidence suggests that risk averse executives are more likely to hedge if they are likely to have a significant portion of their portfolio invested into the firm. 19

Using derivatives to hedge interest rate risk: A student exercise

Using derivatives to hedge interest rate risk: A student exercise ABSTRACT Using derivatives to hedge interest rate risk: A student exercise Jeff Donaldson University of Tampa Donald Flagg University of Tampa In a world of fluctuating asset prices, many firms find the

More information

Aggregate Risk and the Choice Between Cash and Lines of Credit

Aggregate Risk and the Choice Between Cash and Lines of Credit Aggregate Risk and the Choice Between Cash and Lines of Credit Viral Acharya NYU Stern School of Business, CEPR, NBER Heitor Almeida University of Illinois at Urbana Champaign, NBER Murillo Campello Cornell

More information

CHAPTER 1: INTRODUCTION, BACKGROUND, AND MOTIVATION. Over the last decades, risk analysis and corporate risk management activities have

CHAPTER 1: INTRODUCTION, BACKGROUND, AND MOTIVATION. Over the last decades, risk analysis and corporate risk management activities have Chapter 1 INTRODUCTION, BACKGROUND, AND MOTIVATION 1.1 INTRODUCTION Over the last decades, risk analysis and corporate risk management activities have become very important elements for both financial

More information

Dynamic risk management

Dynamic risk management Dynamic risk management Adriano A. Rampini a, Amir Sufi b S. Viswanathan a a Duke University, Fuqua School of Business, 100 Fuqua Drive, Durham, NC, 27708, USA b University of Chicago, Booth School of

More information

Managing Risk Management *

Managing Risk Management * Managing Risk Management * Gordon M. Bodnar SAIS, Johns Hopkins University Washington DC, 20036, USA John Graham Fuqua School of Business, Duke University Durham, NC 27708, USA and National Bureau of Economic

More information

Corporate Interest Rate Risk Management with Derivatives in Australia: Empirical Results.

Corporate Interest Rate Risk Management with Derivatives in Australia: Empirical Results. Corporate Interest Rate Risk Management with Derivatives in Australia: Empirical Results. Luiz Augusto Carneiro 1, Michael Sherris 1 Actuarial Studies, Faculty of Commerce and Economics, University of

More information

The Impacts of Risk Management on Investment and Stock Returns

The Impacts of Risk Management on Investment and Stock Returns Hangyong Lee/ Journal of Economic Research 11 (2006) 279 316 279 The Impacts of Risk Management on Investment and Stock Returns Hangyong Lee 1 Korea Development Institute Received 31 January 2006 ; Accepted

More information

Is Cash Negative Debt?*

Is Cash Negative Debt?* Is Cash Negative Debt?* Viral V. Acharya Heitor Almeida Murillo Campello London Business School & CEPR New York University University of Illinois vacharya@london.edu halmeida@stern.nyu.edu campello@uiuc.edu

More information

How credit analysts view and use the financial statements

How credit analysts view and use the financial statements How credit analysts view and use the financial statements Introduction Traditionally it is viewed that equity investment is high risk and bond investment low risk. Bondholders look at companies for creditworthiness,

More information

Does Executive Portfolio Structure Affect Risk Management? CEO Risktaking Incentives and Corporate Derivatives Usage

Does Executive Portfolio Structure Affect Risk Management? CEO Risktaking Incentives and Corporate Derivatives Usage Does Executive Portfolio Structure Affect Risk Management? CEO Risktaking Incentives and Corporate Derivatives Usage Daniel A. Rogers a a School of Business Administration, Portland State University, Portland,

More information

The Determinants and the Value of Cash Holdings: Evidence. from French firms

The Determinants and the Value of Cash Holdings: Evidence. from French firms The Determinants and the Value of Cash Holdings: Evidence from French firms Khaoula SADDOUR Cahier de recherche n 2006-6 Abstract: This paper investigates the determinants of the cash holdings of French

More information

Financial Flexibility, Risk Management, and Payout Choice

Financial Flexibility, Risk Management, and Payout Choice RFS Advance Access published July 31, 2013 Financial Flexibility, Risk Management, and Payout Choice Alice Adams Bonaimé University of Kentucky Kristine Watson Hankins University of Kentucky Jarrad Harford

More information

The Use of Foreign Currency Derivatives and Firm Market Value

The Use of Foreign Currency Derivatives and Firm Market Value The Use of Foreign Currency Derivatives and Firm Market Value George Allayannis University of Virginia James P. Weston Rice University This article examines the use of foreign currency derivatives (FCDs)

More information

Autoria: Eduardo Kazuo Kayo, Douglas Dias Bastos

Autoria: Eduardo Kazuo Kayo, Douglas Dias Bastos Frequent Acquirers and Financing Policy: The Effect of the 2000 Bubble Burst Autoria: Eduardo Kazuo Kayo, Douglas Dias Bastos Abstract We analyze the effect of the 2000 bubble burst on the financing policy.

More information

Financing Policy, Basis Risk, and Corporate Hedging: Evidence from Oil and Gas Producers

Financing Policy, Basis Risk, and Corporate Hedging: Evidence from Oil and Gas Producers THE JOURNAL OF FINANCE VOL. LV, NO. 1 FEBRUARY 2000 Financing Policy, Basis Risk, and Corporate Hedging: Evidence from Oil and Gas Producers G. DAVID HAUSHALTER* ABSTRACT This paper studies the hedging

More information

Firm Value and Hedging: Evidence from U.S. Oil and Gas Producers

Firm Value and Hedging: Evidence from U.S. Oil and Gas Producers Firm Value and Hedging: Evidence from U.S. Oil and Gas Producers YANBO JIN and PHILIPPE JORION* December 2004 * Department of Finance at California State University, Northridge, and Graduate School of

More information

The Underinvestment Problem and Corporate Derivatives Use

The Underinvestment Problem and Corporate Derivatives Use The Underinvestment Problem and Corporate Derivatives Use Gerald D. Gay and Jouahn Nam Gerald D. Gay is Professor of Finance at Georgia State University. Jouahn Nam is Assistant Professor of Finance at

More information

Jarrad Harford, Sandy Klasa and William Maxwell

Jarrad Harford, Sandy Klasa and William Maxwell Refinancing Risk and Cash Holdings The Journal of Finance Refinancing Risk and Cash Holdings Refinancing Risk and Cash Holdings Jarrad Harford, Sandy Klasa and William Maxwell The Journal of Finance The

More information

Master Thesis Liquidity management before and during the recent financial crisis

Master Thesis Liquidity management before and during the recent financial crisis Master Thesis Liquidity management before and during the recent financial crisis An investigation of the trade-off between internal funds (cash, cash flow and working capital) and external funds (lines

More information

Does Fair Value Reporting Affect Risk Management? International Survey Evidence

Does Fair Value Reporting Affect Risk Management? International Survey Evidence Does Fair Value Reporting Affect Risk Management? International Survey Evidence Karl V. Lins, Henri Servaes, and Ane Tamayo We survey CFOs from 36 countries to examine whether and how firms altered their

More information

The Two Sides of Derivatives Usage: Hedging and Speculating with Interest Rate Swaps *

The Two Sides of Derivatives Usage: Hedging and Speculating with Interest Rate Swaps * The Two Sides of Derivatives Usage: Hedging and Speculating with Interest Rate Swaps * Sergey Chernenko Ph.D. Student Harvard University Michael Faulkender Assistant Professor of Finance R.H. Smith School

More information

The big freeze By Campbell Harvey, John Graham & Murillo Campello Published: February 5 2009 18:35 Last updated: February 5 2009 18:35

The big freeze By Campbell Harvey, John Graham & Murillo Campello Published: February 5 2009 18:35 Last updated: February 5 2009 18:35 Page 1 of 5 SPECIAL REPORTS Close The big freeze By Campbell Harvey, John Graham & Murillo Campello Published: February 5 2009 18:35 Last updated: February 5 2009 18:35 Investigating the credit crisis

More information

Hedging Strategies Using Futures. Chapter 3

Hedging Strategies Using Futures. Chapter 3 Hedging Strategies Using Futures Chapter 3 Fundamentals of Futures and Options Markets, 8th Ed, Ch3, Copyright John C. Hull 2013 1 The Nature of Derivatives A derivative is an instrument whose value depends

More information

ARE YOU TAKING THE WRONG FX RISK? Focusing on transaction risks may be a mistake. Structural and portfolio risks require more than hedging

ARE YOU TAKING THE WRONG FX RISK? Focusing on transaction risks may be a mistake. Structural and portfolio risks require more than hedging ARE YOU TAKING THE WRONG FX RISK? Focusing on transaction risks may be a mistake Structural and portfolio risks require more than hedging Companies need to understand not just correlate the relationship

More information

Does Hedging Increase Firm Value? Evidence from Oil and Gas Producing Firms

Does Hedging Increase Firm Value? Evidence from Oil and Gas Producing Firms Does Hedging Increase Firm Value? Evidence from Oil and Gas Producing Firms Aziz A. Lookman Tepper School of Business Carnegie Mellon University Pittsburgh, PA 15213 al3v@andrew.cmu.edu September 3, 2004

More information

Managerial Stock Options and the Hedging Premium

Managerial Stock Options and the Hedging Premium Managerial Stock Options and the Hedging Premium Niclas Hagelin a, Martin Holmen b, *, John D. Knopf c, and Bengt Pramborg d a The Swedish National Debt Office, SE-103 74 Stockholm, Sweden b Department

More information

Exchange Rates and Foreign Direct Investment

Exchange Rates and Foreign Direct Investment Exchange Rates and Foreign Direct Investment Written for the Princeton Encyclopedia of the World Economy (Princeton University Press) By Linda S. Goldberg 1 Vice President, Federal Reserve Bank of New

More information

LVIP Dimensional Non-U.S. Equity RPM Fund. Summary Prospectus April 30, 2013

LVIP Dimensional Non-U.S. Equity RPM Fund. Summary Prospectus April 30, 2013 LVIP Dimensional Non-U.S. Equity RPM Fund (formerly LVIP Dimensional Non-U.S. Equity Fund) (Standard and Service Class) Summary Prospectus April 30, 2013 Before you invest, you may want to review the Fund

More information

Debt Capacity and Tests of Capital Structure Theories

Debt Capacity and Tests of Capital Structure Theories Debt Capacity and Tests of Capital Structure Theories Michael L. Lemmon David Eccles School of Business University of Utah email: finmll@business.utah.edu Jaime F. Zender Leeds School of Business University

More information

Liquidity Management and Corporate Investment During a Financial Crisis*

Liquidity Management and Corporate Investment During a Financial Crisis* Liquidity Management and Corporate Investment During a Financial Crisis* Murillo Campello University of Illinois &NBER campello@illinois.edu Erasmo Giambona University of Amsterdam e.giambona@uva.nl John

More information

The Value-relevance of Foreign Currency Derivatives Disclosures

The Value-relevance of Foreign Currency Derivatives Disclosures The Value-relevance of Foreign Currency Derivatives Disclosures Aline Muller*, ** and Willem F. C. Verschoor* February 2008 Abstract This paper studies the value-relevance of FCD disclosures of European

More information

Hedging or Market Timing? Selecting the Interest Rate. Exposure of Corporate Debt

Hedging or Market Timing? Selecting the Interest Rate. Exposure of Corporate Debt Hedging or Market Timing? Selecting the Interest Rate Exposure of Corporate Debt MICHAEL FAULKENDER * ABSTRACT This paper examines whether firms are hedging or timing the market when selecting the interest

More information

Enterprise Financial Risk Management. Kenneth Winston Senior Investment Officer. OppenheimerFunds

Enterprise Financial Risk Management. Kenneth Winston Senior Investment Officer. OppenheimerFunds OppenheimerFunds Enterprise Financial Risk Management Kenneth Winston Senior Investment Officer 2003 Kenneth J. Winston Kwinston@oppenheimerfunds.com Definition of Enterprise Financial Risk Management

More information

Cash Savings from Net Equity Issues, Net Debt Issues, and Cash Flows International Evidence. Bruce Seifert. Halit Gonenc

Cash Savings from Net Equity Issues, Net Debt Issues, and Cash Flows International Evidence. Bruce Seifert. Halit Gonenc Cash Savings from Net Equity Issues, Net Debt Issues, and Cash Flows International Evidence Bruce Seifert Department of Business Administration College of Business and Public Administration Old Dominion

More information

POLICY STATEMENT TO REGULATION 55-103 RESPECTING INSIDER REPORTING FOR CERTAIN DERIVATIVE TRANSACTIONS (EQUITY MONETIZATION)

POLICY STATEMENT TO REGULATION 55-103 RESPECTING INSIDER REPORTING FOR CERTAIN DERIVATIVE TRANSACTIONS (EQUITY MONETIZATION) POLICY STATEMENT TO REGULATION 55-103 RESPECTING INSIDER REPORTING FOR CERTAIN DERIVATIVE TRANSACTIONS (EQUITY MONETIZATION) The members of the Canadian Securities Administrators (the CSA) that have adopted

More information

Fundamentals Level Skills Module, Paper F9

Fundamentals Level Skills Module, Paper F9 Answers Fundamentals Level Skills Module, Paper F9 Financial Management December 2008 Answers 1 (a) Rights issue price = 2 5 x 0 8 = $2 00 per share Theoretical ex rights price = ((2 50 x 4) + (1 x 2 00)/5=$2

More information

An Empirical Analysis of Insider Rates vs. Outsider Rates in Bank Lending

An Empirical Analysis of Insider Rates vs. Outsider Rates in Bank Lending An Empirical Analysis of Insider Rates vs. Outsider Rates in Bank Lending Lamont Black* Indiana University Federal Reserve Board of Governors November 2006 ABSTRACT: This paper analyzes empirically the

More information

Do Firms Use Derivatives to Reduce their Dependence on External Capital Markets?

Do Firms Use Derivatives to Reduce their Dependence on External Capital Markets? European Finance Review 6: 163 187, 2002. 2002 Kluwer Academic Publishers. Printed in the Netherlands. 163 Do Firms Use Derivatives to Reduce their Dependence on External Capital Markets? TIM R. ADAM Hong

More information

The Cash Flow Sensitivity of Cash

The Cash Flow Sensitivity of Cash THE JOURNAL OF FINANCE VOL. LIX, NO. 4 AUGUST 2004 The Cash Flow Sensitivity of Cash HEITOR ALMEIDA, MURILLO CAMPELLO, and MICHAEL S. WEISBACH ABSTRACT We model a firm s demand for liquidity to develop

More information

Using Currency Futures to Hedge Currency Risk

Using Currency Futures to Hedge Currency Risk Using Currency Futures to Hedge Currency Risk By Sayee Srinivasan & Steven Youngren Product Research & Development Chicago Mercantile Exchange Inc. Introduction Investment professionals face a tough climate.

More information

A review of the rationales for corporate risk management: fashion or the need?

A review of the rationales for corporate risk management: fashion or the need? Trg J. F. Kennedya 6 10000 Zagreb, Croatia Tel +385(0)1 238 3333 http://www.efzg.hr/wps wps@efzg.hr WORKING PAPER SERIES Paper No. 07-14 Danijela Miloš Sprčić A review of the rationales for corporate risk

More information

Introduction to Futures Contracts

Introduction to Futures Contracts Introduction to Futures Contracts September 2010 PREPARED BY Eric Przybylinski Research Analyst Gregory J. Leonberger, FSA Director of Research Abstract Futures contracts are widely utilized throughout

More information

Chapter 7. . 1. component of the convertible can be estimated as 1100-796.15 = 303.85.

Chapter 7. . 1. component of the convertible can be estimated as 1100-796.15 = 303.85. Chapter 7 7-1 Income bonds do share some characteristics with preferred stock. The primary difference is that interest paid on income bonds is tax deductible while preferred dividends are not. Income bondholders

More information

Chapter 13 Dividend Policy

Chapter 13 Dividend Policy Chapter 13 Dividend Policy Answers to Concept Review Questions 1. What policies and payments does a firm s dividend policy consist of? Why is determining dividend policy more difficult today than in decades

More information

Capital Market Imperfections and the Sensitivity of Investment to Stock Prices

Capital Market Imperfections and the Sensitivity of Investment to Stock Prices Capital Market Imperfections and the Sensitivity of Investment to Stock Prices Alexei V. Ovtchinnikov Owen Graduate School of Management Vanderbilt University alexei.ovtchinnikov@owen.vanderbilt.edu and

More information

Is Cash Negative Debt? A Hedging Perspective on Corporate Financial Policies*

Is Cash Negative Debt? A Hedging Perspective on Corporate Financial Policies* Is Cash Negative Debt? A Hedging Perspective on Corporate Financial Policies* Viral V. Acharya Heitor Almeida Murillo Campello London Business School New York University University of Illinois &CEPR &NBER

More information

Revolving Credit Facilities versus Cash in Corporate Liquidity Management: the Role of Corporate Governance

Revolving Credit Facilities versus Cash in Corporate Liquidity Management: the Role of Corporate Governance Revolving Credit Facilities versus Cash in Corporate Liquidity Management: the Role of Corporate Governance Author: Maurits Snijder Student number: 5697441 Date: August 1 st 2013 Supervisor: Veliyana Malinova

More information

Managing Corporate Risk

Managing Corporate Risk Managing Corporate Risk Clifford W. Smith Jr. University of Rochester William E. Simon Graduate School of Business Administration CS-3-202C Carol Simon Hall, Box 270100 Rochester, New York 14627-0100 cliff.smith@simon.rochester.edu

More information

T. Rowe Price International Bond Fund T. Rowe Price International Bond Fund Advisor Class

T. Rowe Price International Bond Fund T. Rowe Price International Bond Fund Advisor Class T. Rowe Price International Bond Fund T. Rowe Price International Bond Fund Advisor Class Supplement to Prospectuses Dated May 1, 2015 In section 1, the portfolio manager table under Management with respect

More information

Can financial risk management help prevent bankruptcy?

Can financial risk management help prevent bankruptcy? Can financial risk management help prevent bankruptcy? ABSTRACT Monica Marin HEC Montréal This paper extends the literature on the relationship between firm risk management and financial distress. It compares

More information

Risk Management and Distress: Hedging with Purchase Obligations

Risk Management and Distress: Hedging with Purchase Obligations Risk Management and Distress: Hedging with Purchase Obligations Kristine Watson Hankins University of Kentucky Ryan Williams University of Arizona October 31, 2014 Abstract: Purchase obligations are forward

More information

Capital Expenditures, Financial Constraints, and the Use of Options

Capital Expenditures, Financial Constraints, and the Use of Options Capital Expenditures, Financial Constraints, and the Use of Options Tim Adam M.I.T. - Sloan School of Management 50 Memorial Drive, E52-403A Cambridge, MA 02142, USA Tel.: (617) 253-5123 Fax: (617) 258-6855

More information

Emerging Markets Bond Fund Emerging Markets Corporate Bond Fund Emerging Markets Local Currency Bond Fund International Bond Fund

Emerging Markets Bond Fund Emerging Markets Corporate Bond Fund Emerging Markets Local Currency Bond Fund International Bond Fund PROSPECTUS PREMX TRECX PRELX RPIBX T. Rowe Price Emerging Markets Bond Fund Emerging Markets Corporate Bond Fund Emerging Markets Local Currency Bond Fund International Bond Fund May 1, 2016 A choice of

More information

Bank Lines of Credit in Corporate Finance: An Empirical Analysis

Bank Lines of Credit in Corporate Finance: An Empirical Analysis RFS Advance Access published January 31, 2007 Bank Lines of Credit in Corporate Finance: An Empirical Analysis AMIR SUFI* University of Chicago Graduate School of Business 5807 South Woodlawn Avenue Chicago,

More information

Small Business Borrowing and the Owner Manager Agency Costs: Evidence on Finnish Data. Jyrki Niskanen Mervi Niskanen 10.11.2005

Small Business Borrowing and the Owner Manager Agency Costs: Evidence on Finnish Data. Jyrki Niskanen Mervi Niskanen 10.11.2005 Small Business Borrowing and the Owner Manager Agency Costs: Evidence on Finnish Data Jyrki Niskanen Mervi Niskanen 10.11.2005 Abstract. This study investigates the impact that managerial ownership has

More information

Access to Liquidity and Corporate Investment in Europe During the Credit Crisis of 2009*

Access to Liquidity and Corporate Investment in Europe During the Credit Crisis of 2009* Access to Liquidity and Corporate Investment in Europe During the Credit Crisis of 2009* Murillo Campello University of Illinois & NBER campello@illinois.edu John R. Graham Duke University & NBER john.graham@duke.edu

More information

Is there Information Content in Insider Trades in the Singapore Exchange?

Is there Information Content in Insider Trades in the Singapore Exchange? Is there Information Content in Insider Trades in the Singapore Exchange? Wong Kie Ann a, John M. Sequeira a and Michael McAleer b a Department of Finance and Accounting, National University of Singapore

More information

RISK MANAGEMENT: PROFILING AND HEDGING

RISK MANAGEMENT: PROFILING AND HEDGING RISK MANAGEMENT: PROFILING AND HEDGING To manage risk, you first have to understand the risks that you are exposed to. This process of developing a risk profile thus requires an examination of both the

More information

The Agency Effects on Investment, Risk Management and Capital Structure

The Agency Effects on Investment, Risk Management and Capital Structure The Agency Effects on Investment, Risk Management and Capital Structure Worawat Margsiri University of Wisconsin Madison I thank my dissertation advisor Antonio Mello for invaluable guidance. Any errors

More information

BUSM 411: Derivatives and Fixed Income

BUSM 411: Derivatives and Fixed Income BUSM 411: Derivatives and Fixed Income 2. Forwards, Options, and Hedging This lecture covers the basic derivatives contracts: forwards (and futures), and call and put options. These basic contracts are

More information

Condensed Interim Consolidated Financial Statements of. Canada Pension Plan Investment Board

Condensed Interim Consolidated Financial Statements of. Canada Pension Plan Investment Board Condensed Interim Consolidated Financial Statements of Canada Pension Plan Investment Board September 30, 2015 Condensed Interim Consolidated Balance Sheet As at September 30, 2015 As at September 30,

More information

American Funds Insurance Series Portfolio Series. Prospectus May 1, 2015. American Funds Managed Risk Global Allocation Portfolio

American Funds Insurance Series Portfolio Series. Prospectus May 1, 2015. American Funds Managed Risk Global Allocation Portfolio American Funds Insurance Series Portfolio Series Prospectus May 1, 2015 Class 4 shares American Funds Global Growth Portfolio American Funds Growth and Income Portfolio Class P2 shares American Funds Managed

More information

Determinants of Capital Structure in Developing Countries

Determinants of Capital Structure in Developing Countries Determinants of Capital Structure in Developing Countries Tugba Bas*, Gulnur Muradoglu** and Kate Phylaktis*** 1 Second draft: October 28, 2009 Abstract This study examines the determinants of capital

More information

EQUINOX ANNOUNCES LAUNCH OF EQUINOX EQUITYHEDGE U.S. STRATEGY FUND A DYNAMICALLY-HEDGED, ACTIVELY MANAGED EQUITY MUTUAL FUND

EQUINOX ANNOUNCES LAUNCH OF EQUINOX EQUITYHEDGE U.S. STRATEGY FUND A DYNAMICALLY-HEDGED, ACTIVELY MANAGED EQUITY MUTUAL FUND EQUINOX ANNOUNCES LAUNCH OF EQUINOX EQUITYHEDGE U.S. STRATEGY FUND A DYNAMICALLY-HEDGED, ACTIVELY MANAGED EQUITY MUTUAL FUND PRINCETON, NJ, October 2, 2013 Equinox Financial Group, LLC ( Equinox ), a leading

More information

Derivative Users Traders of derivatives can be categorized as hedgers, speculators, or arbitrageurs.

Derivative Users Traders of derivatives can be categorized as hedgers, speculators, or arbitrageurs. OPTIONS THEORY Introduction The Financial Manager must be knowledgeable about derivatives in order to manage the price risk inherent in financial transactions. Price risk refers to the possibility of loss

More information

LVIP Dimensional U.S. Equity RPM Fund. Summary Prospectus April 30, 2013. (formerly LVIP Dimensional U.S. Equity Fund) (Standard and Service Class)

LVIP Dimensional U.S. Equity RPM Fund. Summary Prospectus April 30, 2013. (formerly LVIP Dimensional U.S. Equity Fund) (Standard and Service Class) LVIP Dimensional U.S. Equity RPM Fund (formerly LVIP Dimensional U.S. Equity Fund) (Standard and Service Class) Summary Prospectus April 30, 2013 Before you invest, you may want to review the Fund s Prospectus,

More information

International Financial Reporting Standard 7. Financial Instruments: Disclosures

International Financial Reporting Standard 7. Financial Instruments: Disclosures International Financial Reporting Standard 7 Financial Instruments: Disclosures INTERNATIONAL FINANCIAL REPORTING STANDARD AUGUST 2005 International Financial Reporting Standard 7 Financial Instruments:

More information

Determinants of short-term debt financing

Determinants of short-term debt financing ABSTRACT Determinants of short-term debt financing Richard H. Fosberg William Paterson University In this study, it is shown that both theories put forward to explain the amount of shortterm debt financing

More information

Capital Market Access and Corporate Loan Structure. Kenneth Khang. Idaho State University. Tao-Hsien Dolly King

Capital Market Access and Corporate Loan Structure. Kenneth Khang. Idaho State University. Tao-Hsien Dolly King Capital Market Access and Corporate Loan Structure Kenneth Khang Idaho State University Tao-Hsien Dolly King University of North Carolina - Charlotte Current version: September 2010 We thank Steven Byers

More information

for Analysing Listed Private Equity Companies

for Analysing Listed Private Equity Companies 8 Steps for Analysing Listed Private Equity Companies Important Notice This document is for information only and does not constitute a recommendation or solicitation to subscribe or purchase any products.

More information

Capital Market Imperfections and Equity Derivatives: A Case of Malaysian Non-Financial Firms

Capital Market Imperfections and Equity Derivatives: A Case of Malaysian Non-Financial Firms Middle-East Journal of Scientific Research 17 (1): 110-116, 2013 ISSN 1990-9233 IDOSI Publications, 2013 DOI: 10.5829/idosi.mejsr.2013.17.01.12153 Capital Market Imperfections and Equity Derivatives: A

More information

Impact of Diversification Strategy on the Capital Structure Decisions of Manufacturing Firms in India

Impact of Diversification Strategy on the Capital Structure Decisions of Manufacturing Firms in India Impact of Diversification Strategy on the Capital Structure Decisions of Manufacturing Firms in India Ranjitha Ajay and R Madhumathi Indian Institute of Technology Madras, Chennai Abstract. Indian corporate

More information

What Drives Corporate Liquidity? An International Survey of Cash Holdings and Lines of Credit

What Drives Corporate Liquidity? An International Survey of Cash Holdings and Lines of Credit What Drives Corporate Liquidity? An International Survey of Cash Holdings and Lines of Credit Karl V. Lins University of Utah Henri Servaes London Business School, CEPR and ECGI Peter Tufano Harvard University

More information

Condensed Interim Consolidated Financial Statements of. Canada Pension Plan Investment Board

Condensed Interim Consolidated Financial Statements of. Canada Pension Plan Investment Board Condensed Interim Consolidated Financial Statements of Canada Pension Plan Investment Board December 31, 2015 Condensed Interim Consolidated Balance Sheet As at December 31, 2015 (CAD millions) As at December

More information

On the Conditioning of the Financial Market s Reaction to Seasoned Equity Offerings *

On the Conditioning of the Financial Market s Reaction to Seasoned Equity Offerings * The Lahore Journal of Economics 11 : 2 (Winter 2006) pp. 141-154 On the Conditioning of the Financial Market s Reaction to Seasoned Equity Offerings * Onur Arugaslan ** and Louise Miller *** Abstract Consistent

More information

Alex Beath and Jody MacIntosh

Alex Beath and Jody MacIntosh Rotman International Journal of Pension Management Volume 6 Issue 1 Spring 2013 Risk-Management Practices at Large Pension Plans: Findings from a Unique 27-Fund Survey Alex Beath and Jody MacIntosh Alex

More information

The Long-Term Cost of the Financial Crisis* 1

The Long-Term Cost of the Financial Crisis* 1 The Long-Term Cost of the Financial Crisis* 1 Murillo Campello John R. Graham Campbell R. Harvey University of Illinois Duke University Duke University & NBER & NBER & NBER campello@illinois.edu john.graham@duke.edu

More information

Understanding Fixed Income

Understanding Fixed Income Understanding Fixed Income 2014 AMP Capital Investors Limited ABN 59 001 777 591 AFSL 232497 Understanding Fixed Income About fixed income at AMP Capital Our global presence helps us deliver outstanding

More information

Capital Expenditures, Financial Constraints, and the Use of Options

Capital Expenditures, Financial Constraints, and the Use of Options Capital Expenditures, Financial Constraints, and the Use of Options Tim Adam M.I.T. - Sloan School of Management August 2006 Abstract This paper analyzes the use of options strategies in the North American

More information

PERFORMING DUE DILIGENCE ON NONTRADITIONAL BOND FUNDS. by Mark Bentley, Executive Vice President, BTS Asset Management, Inc.

PERFORMING DUE DILIGENCE ON NONTRADITIONAL BOND FUNDS. by Mark Bentley, Executive Vice President, BTS Asset Management, Inc. PERFORMING DUE DILIGENCE ON NONTRADITIONAL BOND FUNDS by Mark Bentley, Executive Vice President, BTS Asset Management, Inc. Investors considering allocations to funds in Morningstar s Nontraditional Bond

More information

Advanced Financial Management

Advanced Financial Management Progress Test 2 Advanced Financial Management P4AFM-PT2-Z14-A Answers & Marking Scheme 2014 DeVry/Becker Educational Development Corp. Tutorial note: the answers below are more comprehensive than would

More information

Volatility: A Brief Overview

Volatility: A Brief Overview The Benefits of Systematically Selling Volatility July 2014 By Jeremy Berman Justin Frankel Co-Portfolio Managers of the RiverPark Structural Alpha Fund Abstract: A strategy of systematically selling volatility

More information

EFRAG Short Discussion Series THE USE OF INFORMATION BY CAPITAL PROVIDERS IMPLICATIONS FOR STANDARD SETTING

EFRAG Short Discussion Series THE USE OF INFORMATION BY CAPITAL PROVIDERS IMPLICATIONS FOR STANDARD SETTING EFRAG Short Discussion Series THE USE OF INFORMATION BY CAPITAL PROVIDERS IMPLICATIONS FOR STANDARD SETTING JAN 2014 This document has been published by EFRAG to assist constituents in developing their

More information

Futures Price d,f $ 0.65 = (1.05) (1.04)

Futures Price d,f $ 0.65 = (1.05) (1.04) 24 e. Currency Futures In a currency futures contract, you enter into a contract to buy a foreign currency at a price fixed today. To see how spot and futures currency prices are related, note that holding

More information

Corporate Dividend Policy

Corporate Dividend Policy Global Markets February 2006 Corporate Dividend Policy Authors Henri Servaes Professor of Finance London Business School Peter Tufano Sylvan C. Coleman Professor of Financial Management Harvard Business

More information

Organizational Structure and Insurers Risk Taking: Evidence from the Life Insurance Industry in Japan

Organizational Structure and Insurers Risk Taking: Evidence from the Life Insurance Industry in Japan Organizational Structure and Insurers Risk Taking: Evidence from the Life Insurance Industry in Japan Noriyoshi Yanase, Ph.D (Tokyo Keizai University, Japan) 2013 ARIA Annual Meeting 1 1. Introduction

More information

Rating Methodology for Domestic Life Insurance Companies

Rating Methodology for Domestic Life Insurance Companies Rating Methodology for Domestic Life Insurance Companies Introduction ICRA Lanka s Claim Paying Ability Ratings (CPRs) are opinions on the ability of life insurance companies to pay claims and policyholder

More information

Bank Borrowing and Corporate Risk. Management

Bank Borrowing and Corporate Risk. Management Bank Borrowing and Corporate Risk Management Aziz A. Lookman Tepper School of Business Carnegie Mellon University Pittsburgh, PA 15213 Email: aziz.lookman@cmu.edu November 29, 2004 I thank my dissertation

More information

Rethinking Fixed Income

Rethinking Fixed Income Rethinking Fixed Income Challenging Conventional Wisdom May 2013 Risk. Reinsurance. Human Resources. Rethinking Fixed Income: Challenging Conventional Wisdom With US Treasury interest rates at, or near,

More information

The University of Texas Investment Management Company Derivative Investment Policy

The University of Texas Investment Management Company Derivative Investment Policy Effective Date of Policy: August 12, 2010 Date Approved by U. T. System Board of Regents: August 12, 2010 Date Approved by UTIMCO Board: July 14, 2010 Supersedes: approved August 20, 2009 Purpose: The

More information

ADVISORSHARES YIELDPRO ETF (NASDAQ Ticker: YPRO) SUMMARY PROSPECTUS November 1, 2015

ADVISORSHARES YIELDPRO ETF (NASDAQ Ticker: YPRO) SUMMARY PROSPECTUS November 1, 2015 ADVISORSHARES YIELDPRO ETF (NASDAQ Ticker: YPRO) SUMMARY PROSPECTUS November 1, 2015 Before you invest in the AdvisorShares Fund, you may want to review the Fund s prospectus and statement of additional

More information

Chapter 16: Financial Risk Management

Chapter 16: Financial Risk Management Chapter 16: Financial Risk Management Introduction Overview of Financial Risk Management in Treasury Interest Rate Risk Foreign Exchange (FX) Risk Commodity Price Risk Managing Financial Risk The Benefits

More information

Derivatives and Corporate Risk Management: Participation and Volume Decisions in the Insurance Industry

Derivatives and Corporate Risk Management: Participation and Volume Decisions in the Insurance Industry Financial Institutions Center Derivatives and Corporate Risk Management: Participation and Volume Decisions in the Insurance Industry by J. David Cummins Richard D. Phillips Stephen D. Smith 98-19 THE

More information

VANDERBILT AVENUE ASSET MANAGEMENT

VANDERBILT AVENUE ASSET MANAGEMENT SUMMARY CURRENCY-HEDGED INTERNATIONAL FIXED INCOME INVESTMENT In recent years, the management of risk in internationally diversified bond portfolios held by U.S. investors has been guided by the following

More information

ACCOUNTING STANDARDS BOARD FINANCIAL CAPITAL MANAGEMENT DISCLOSURES

ACCOUNTING STANDARDS BOARD FINANCIAL CAPITAL MANAGEMENT DISCLOSURES ACCOUNTING STANDARDS BOARD FINANCIAL CAPITAL MANAGEMENT DISCLOSURES DECEMBER 2010 Contents Highlights One - Introduction 1 Two - Market feedback 2 Three - Business review disclosures 3 Four - IFRS disclosures

More information

What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated?

What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? HOCK international - 2004 1 HOCK international - 2004 2 How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? HOCK

More information

Payout Policy and Real Estate Prices

Payout Policy and Real Estate Prices Payout Policy and Real Estate Prices Anil Kumar Carles Vergara-Alert November 18, 2015 Abstract This paper studies the impact of real estate prices on the payout policy of firms. Firms use corporate real

More information

MANAGERIAL INCENTIVES AND THE USE OF FOREIGN-EXCHANGE DERIVATIVES BY BANKS

MANAGERIAL INCENTIVES AND THE USE OF FOREIGN-EXCHANGE DERIVATIVES BY BANKS MANAGERIAL INCENTIVES AND THE USE OF FOREIGN-EXCHANGE DERIVATIVES BY BANKS LEE C. ADKINS, DAVID A. CARTER, AND W. GARY SIMPSON OKLAHOMA STATE UNIVERSITY Abstract. We examine the effect of managerial incentives

More information

The Financial Crises of the 21st Century

The Financial Crises of the 21st Century The Financial Crises of the 21st Century Workshop of the Austrian Research Association (Österreichische Forschungsgemeinschaft) 18. - 19. 10. 2012 Towards a Unified European Banking Market Univ.Prof. Dr.

More information