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Alleviating Coordination Problems and Regulatory Constraints Through Financial Risk Management

Author

Listed:
  • Marcel Boyer

    (Université de Montréal, CIRANO and CIREQ, Canada)

  • M. Martin Boyer

    (HEC Montréal, Université de Montréal and CIRANO, Canada)

  • René Garcia

    (Edhec Business School, CIRANO and CIREQ, France)

Abstract

Seeing the firm as a nexus of activities and projects, we propose a characterization of the firm where variations in the market price of risk should induce adjustments in the firm's portfolio of projects. In a setting where managers disagree with respect to what investment maximizes value, changing the portfolio of projects generates coordination costs. We then propose a new role for financial risk management based on the idea that the use of financial derivatives reduces coordination costs by moving the organization's expected cash flows and risks toward a point where coordination in favor of real changes is easier to achieve. We find empirical support for this new rationale for the use of financial derivatives, after controlling for the traditional variables explaining the need for financial risk management.

Suggested Citation

  • Marcel Boyer & M. Martin Boyer & René Garcia, 2013. "Alleviating Coordination Problems and Regulatory Constraints Through Financial Risk Management," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 1-39.
    • Handle: RePEc:wsi:qjfxxx:v:03:y:2013:i:02:n:s2010139213500092
    DOI: 10.1142/S2010139213500092
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    Cited by:

    1. Dirk Höring & Helmut Gründl & Sebastian Schlütter, 2016. "Impediments to Communication in Financial Institutions: Implications for the Risk Management Organization," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 41(2), pages 193-224, September.
    2. Dirk Höring & Helmut Gründl & Sebastian Schlütter, 2016. "Impediments to Communication in Financial Institutions: Implications for the Risk Management Organization," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 41(2), pages 193-224, September.

    More about this item

    Keywords

    Risk management; firm value; coordination problems; hedging; value at risk; JEL Classifications: G32; JEL Classifications: D2; JEL Classifications: L2;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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