IDEAS home Printed from https://ideas.repec.org/p/fip/fedgif/632.html
   My bibliography  Save this paper

The implications of risk management information systems for the organization of financial firms

Author

Abstract

Financial dealer firms have invested heavily in recent years to develop information systems for risk measurement. I take it as given that technological progress is likely to continue at a rapid pace, making it less expensive for financial firms to assemble risk information. I look beyond questions of risk measurement methodology to investigate the implications of risk management information systems. By examining several theoretical models of the firm in the presence of asymmetric information, I explore how a financial firm's capital budgeting, incentive compensation, capital structure, and risk management activities are likely to change as it becomes less costly to assemble risk information. I also explore the likely effects of the falling cost of assembling risk information on a financial firm's organizational structure. Two common themes emerge: centralization within the firm and increased disclosure of risk information outside the firm are both likely to increase.

Suggested Citation

  • Michael S. Gibson, 1998. "The implications of risk management information systems for the organization of financial firms," International Finance Discussion Papers 632, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:632
    as

    Download full text from publisher

    File URL: http://www.federalreserve.gov/pubs/ifdp/1998/632/default.htm
    Download Restriction: no
    File URL: http://www.federalreserve.gov/pubs/ifdp/1998/632/ifdp632.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
    2. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    3. Matthew Pritsker, 1997. "Evaluating Value at Risk Methodologies: Accuracy versus Computational Time," Journal of Financial Services Research, Springer;Western Finance Association, vol. 12(2), pages 201-242, October.
    4. Froot, Kenneth A. & Stein, Jeremy C., 1998. "Risk management, capital budgeting, and capital structure policy for financial institutions: an integrated approach," Journal of Financial Economics, Elsevier, vol. 47(1), pages 55-82, January.
    5. Diamond, Douglas W & Verrecchia, Robert E, 1991. "Disclosure, Liquidity, and the Cost of Capital," Journal of Finance, American Finance Association, vol. 46(4), pages 1325-1359, September.
    6. Hirshleifer, David & Suh, Yoon, 1992. "Risk, managerial effort, and project choice," Journal of Financial Intermediation, Elsevier, vol. 2(3), pages 308-345, September.
    7. Harris, Milton & Raviv, Artur, 1996. "The Capital Budgeting Process: Incentives and Information," Journal of Finance, American Finance Association, vol. 51(4), pages 1139-1174, September.
    8. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    9. H. Thomas Johnson, 1991. "Managing by Remote Control: Recent Management Accounting Practice in Historical Perspective," NBER Chapters, in: Inside the Business Enterprise: Historical Perspectives on the Use of Information, pages 41-70, National Bureau of Economic Research, Inc.
    10. Bank for International Settlements, 1997. "The measurement of aggregate market risk," CGFS Papers, Bank for International Settlements, number 07, december.
    11. Michael S. Gibson, 1997. "Information systems for risk management," International Finance Discussion Papers 585, Board of Governors of the Federal Reserve System (U.S.).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Christine M. Cumming & Beverly Hirtle, 2001. "The challenges of risk management in diversified financial companies," Economic Policy Review, Federal Reserve Bank of New York, issue Mar, pages 1-17.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stoughton, Neal M. & Zechner, Josef, 2007. "Optimal capital allocation using RAROC(TM) and EVA(R)," Journal of Financial Intermediation, Elsevier, vol. 16(3), pages 312-342, July.
    2. Bing Han & David Hirshleifer & John C. Persons, 2009. "Promotion Tournaments and Capital Rationing," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 219-255, January.
    3. Karthik Balakrishnan & Aytekin Ertan, 2019. "Bank asset transparency and credit supply," Review of Accounting Studies, Springer, vol. 24(4), pages 1359-1391, December.
    4. Stolowy, Hervé & Jeanjean, Thomas & Erkens, Michael, 2011. "The economic consequences of increasing the international visibility of financial reports," HEC Research Papers Series 957, HEC Paris.
    5. Xin Qu & Majella Percy & Fang Hu & Jenny Stewart, 2022. "Can CEO equity‐based compensation limit investment‐related agency problems?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(2), pages 2579-2614, June.
    6. Loukil, Nadia & Yousfi, Ouidad, 2010. "Firm's information environment and stock liquidity: evidence from Tunisian context," MPRA Paper 28699, University Library of Munich, Germany, revised Feb 2011.
    7. Andres, Christian & Cumming, Douglas & Karabiber, Timur & Schweizer, Denis, 2014. "Do markets anticipate capital structure decisions? — Feedback effects in equity liquidity," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 133-156.
    8. Smith, Stephen D. & Wall, Larry D., 2010. "Debt, hedging and human capital," Journal of Financial Stability, Elsevier, vol. 6(2), pages 55-63, June.
    9. Patty Bick & Matthew D. Crook & Andrew A. Lynch & Brian R. Walkup, 2017. "Does Distance Matter In Mergers And Acquisitions?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 40(1), pages 33-54, March.
    10. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 2002. "Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit‐taking," Journal of Finance, American Finance Association, vol. 57(1), pages 33-73, February.
    11. Ravi Jagannathan & Iwan Meier, 2002. "Do We Need CAPM for Capital Budgeting?," Financial Management, Financial Management Association, vol. 31(4), Winter.
    12. Olga Plesco & Ludmila Sobol, 2013. "The Issue Of Asymmetric Information Upon The Capital Market," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 5(2), pages 254-266.
    13. Houston, Joel & James, Christopher & Marcus, David, 1997. "Capital market frictions and the role of internal capital markets in banking," Journal of Financial Economics, Elsevier, vol. 46(2), pages 135-164, November.
    14. Gałkiewicz, Dominika Paula, 2015. "Loss potential and disclosures related to credit derivatives: A cross-country comparison of corporate bond funds under U.S. and German regulation," SFB 649 Discussion Papers 2015-017, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    15. Pevzner, Mikhail & Xie, Fei & Xin, Xiangang, 2015. "When firms talk, do investors listen? The role of trust in stock market reactions to corporate earnings announcements," Journal of Financial Economics, Elsevier, vol. 117(1), pages 190-223.
    16. Thakor, Anjan V., 1993. "Information, Investment Horizon, and Price Reactions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(4), pages 459-482, December.
    17. Estrella, Arturo, 2004. "The cyclical behavior of optimal bank capital," Journal of Banking & Finance, Elsevier, vol. 28(6), pages 1469-1498, June.
    18. Hans B. Christensen & Luzi Hail & Christian Leuz, 2021. "Mandatory CSR and sustainability reporting: economic analysis and literature review," Review of Accounting Studies, Springer, vol. 26(3), pages 1176-1248, September.
    19. Lonnie L. Bryant & Maureen Butler & Zhongling Cao, 2018. "Mutual Fund Fee Structures and Broker Compensation," Annals of Economics and Finance, Society for AEF, vol. 19(1), pages 197-211, May.
    20. Ritz, Robert A. & Walther, Ansgar, 2015. "How do banks respond to increased funding uncertainty?," Journal of Financial Intermediation, Elsevier, vol. 24(3), pages 386-410.

    More about this item

    Keywords

    Risk;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedgif:632. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ryan Wolfslayer ; Keisha Fournillier (email available below). General contact details of provider: https://edirc.repec.org/data/frbgvus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.