Corporate risk management and asymmetric information

We discuss the effect of information on corporate risk management decisions when the information is asymmetric between the insider and the market. We suggest an explanation for previous contradiction between existing theories and empirical findings, which state that fewer small firms choose to hedge...

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Bibliographic Details
Published inThe Quarterly review of economics and finance Vol. 44; no. 5; pp. 727 - 750
Main Author Zhao, Longkai
Format Journal Article
LanguageEnglish
Published Greenwich Elsevier Inc 01.12.2004
Elsevier
Elsevier Science Ltd
SeriesThe Quarterly Review of Economics and Finance
Subjects
Asymmetric information
Financial management
Hedging
Information management
Risk assessment
Risk management
Signaling
Studies
Asymmetric information
Signaling
Risk management
G30
D82
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Summary:We discuss the effect of information on corporate risk management decisions when the information is asymmetric between the insider and the market. We suggest an explanation for previous contradiction between existing theories and empirical findings, which state that fewer small firms choose to hedge. We consider two different scenarios of information revelation to the market, and find hedging cost is not the main reason preventing firms from hedging. Rather asymmetric information plays the decisive role in a firm's risk management policy. One of the empirical implications we find is that cash flows with high variances may discourage firms from hedging even when they face high financial distress costs.
ISSN:1062-9769
1878-4259
DOI:10.1016/j.qref.2004.04.001