Corporate Risk Management as a Lever for Shareholder Value Creation

Firm value is influenced in many direct and indirect ways by financial risks which consist in unexpected changes of foreign exchange rates, interest rates and commodity prices. The fact that a significant number of corporations are committing resources to risk management activities, however, represents only an indication for the potential of corporate risk management to increase firm value. This paper presents a comprehensive review of positive theories and their empirical evidence regarding the contribution of corporate risk management to shareholder value. It is argued that because of realistic capital market imperfections, such as agency costs, transaction costs, taxes, and increasing costs of external financing, risk management on the firm level (as opposed to risk management by stock owners) represents a means to increase firm value to the benefit of the shareholders.