Firm Risk Management Policies: Financial Hedging and Corporate Diversification

• Main Authors: WANG, Heli C., LIM, Seongyeon
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2001
• Subjects: risk management; finance mathematical models; hedging; diversification; risk exposure; Finance and Financial Management; Strategic Management Policy
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/3445; https://doi.org/10.5465/APBPP.2001.6132940
• Institution: Singapore Management University

Under what conditions will a firm engage in related or unrelated diversification to manage its risk exposures? Under what conditions will a firm use financial hedging markets to manage its risk exposures? Although it first appears that financial hedging and firm diversification may be substitutes in managing risks, this paper argues that is often not the case. Specifically, this paper develops a stakeholder theory of firm risk management and shows that financial hedging and diversification are more often complementary rather than substitutive means of risk management. Therefore, the introduction of financial hedging markets can increase the incentive for corporate diversification.