Corporate Risk Management and Optimal Hedging Disclosure
34 Pages Posted: 5 Jan 1998
Date Written: September 1997
This paper discusses the role of risk management in a corporation, focusing on the e ects of disclosing information regarding risk exposure and financial hedging. I consider effects on: value of the firm to shareholders, managerial contracts, and selection of projects. The analysis is conducted at the light of the currently debated hedge accounting issues. I bring together until now separate aspects of the literature on risk management (an agency setting, proprietary information, and the informational effect of disclosure) conciliating these in a renegotiation game. Additional release of information, endogenously determined, can "trigger" recontracting. In this model the manager has a say on the choice of projects of the firm, its hedging policy and disclosure of information. The level of "informativeness" of the disclosure is crucial in determining whether shareholders benefit or not from it. When very informative, disclosure is beneficial to all; whereas if serious asymmetries of information remain after disclosure, that may not be the case.
JEL Classification: D82, M41, M45
Suggested Citation: Suggested Citation