Bena, Jan (2006) Choice of corporate risk management tools under moral hazard. Financial Markets Group Discussion Papers (566). Financial Markets Group, The London School of Economics and Political Science, London, UK.
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Abstract
This paper examines the choice of tools for managing a firm’s operational risks: cash reserves, insurance contracts, and financial assets under an optimal financing contract that solves moral hazard between insiders and outside investors. Risk management is valuable as it reduces the costs of raising external financing, increases debt capacity, lessens underinvestment, and improves welfare. I show that insurance is superior as it facilitates the outside financing relationship but leads to inefficient excessive continuation if used without coverage limits. When insurance against an operational risk is not available, the firm uses financial assets instead or resorts to holding cash reserves.
| Item Type: | Monograph (Discussion Paper) |
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| Official URL: | https://www.fmg.ac.uk/ |
| Additional Information: | © 2006 The Author |
| Divisions: | Financial Markets Group |
| Subjects: | H Social Sciences > HB Economic Theory |
| JEL classification: | D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information G - Financial Economics > G2 - Financial Institutions and Services > G22 - Insurance; Insurance Companies G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting; Fixed Investment and Inventory Studies |
| Date Deposited: | 19 Jul 2009 19:31 |
| Last Modified: | 11 Dec 2024 18:45 |
| URI: | http://eprints.lse.ac.uk/id/eprint/24518 |
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