The revolution in risk management

The revolution in risk management - Santomero The...

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Santomero “The Revolution in risk management” o Agents are thought to maximise their personal gains according to a series of constraints o Investors can select which companies to invest in to obtain their desired risk-return profile → companies have no reason to obtain a particular risk profile since shareholders can diversify away any unwanted risk o View has changed → firm-level risk is an important criterion and several theories for optimum volatility management have been developed Why manage risk? o Management is not only concerned with expected profit but also the variability of profits due to o o Tax structure o Cost of financial distress o Existence of capital market imperfections Managerial self-interest (Risk-aversion) o Managers have limited ability to diversify their own personal wealth position, which is associated with their company-specific stock holdings and the value of current salary → desire to stabilize earnings variability o Managers could also offset their risk within the company by
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The revolution in risk management - Santomero The...

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