Ali M Fatemi

Corporate risk management: Costs and benefits

Abstract This paper establishes a framework within which the costs and the benefits of corporate risk management decisions can be analyzed. The most important conclusion is that risk management strategies should be pursued to enhance shareholder value. Although systematic hedging of all variation in the net cashflows may be in the best interest of the management, such behavior is inconsistent with maximizing firm and shareholder value. The extant empirical evidence cited is supportive of the notion that the strongest motive for risk management behavior is the avoidance of financial distress. However, there are offsetting costs to consider as well. The existence of these costs makes it imperative that shareholders understand the risk management process.

Risk management practices of German firms

Identifies some gaps in corporate risk management research and presents a study of risk management practices in large, non‐financial German firms. Compares the perceived relevance of different types of risk with the intensity of their management and reports that no respondents admitted major difficulty in developing a risk management system. Finds that firm survival is rated as the top goal of risk management, that respondents are closer to risk‐neutral than risk‐averse for financial risks, that around half centralize treasury management and 88 per cent use derivatives. Ranks the types of derivatives used and the importance of associated problems; shows how foreign exchange risk, US

Credit risk management: a survey of practices

exposure and interest rate risk are managed; and assesses attitudes towards foreign exchange and interest rate risk management. Considers consistency with other research and calls for more.

Wealth Creation and Managerial Pay: MVA and EVA as Determinants of Executive Compensation

Purpose – Proposes to investigate the current practices of credit risk management by the largest US-based financial institutions. Owing to the increasing variety in the types of counterparties and the ever-expanding variety in the forms of obligations, credit risk management has jumped to the forefront of risk management activities carried out by firms in the financial services industry. This study is designed to shed light on the current practices of these firms. Design/methodology/approach - A short questionnaire, containing seven questions, was mailed to each of the top 100 banking firms headquartered in the USA. Findings - It was found that identifying counterparty default risk is the single most-important purpose served by the credit risk models utilized. Close to half of the responding institutions utilize models that are also capable of dealing with counterparty migration risk. Surprisingly, only a minority of banks currently utilize either a proprietary or a vendor-marketed model for the management of their credit risk. Interestingly, those that utilize their own in-house model also utilize a vendor-marketed model. Not surprisingly, such models are more widely used for the management of non-traded credit loan portfolios than they are for the management of traded bonds. Originality/value -The results help one to understand the current practices of these firms. As such, they enable us to make inferences about the perceived importance of the risks. The paper is of particular value to the treasurers intending to better understand the current trends in credit risk management, and to academics intending to carry out research in the field.

Capital structure and dividend policies of Indonesian firms

Designing effective compensation contracts has become increasingly complex due to the globalization of the executive work force and the multitude of incentive schemes. We examine the relationships between managerial pay and firm performance among domestic and global firms using economic value added (EVA) and market value added (MVA) to assess wealth creation. Our work suggests that top managers in domestic- and globally focused firms are not only incented to increase EVA, but also rewarded for past additions to MVA. The results of our research suggest that managers of highly globalized firms tend to be paid at higher levels, reflecting the increased complexity of managing global firms.

Foreign Exchange Exposure and the Pricing of Exchange Rate Risk

Abstract This paper investigates the capital structure and dividend policies of a sample of large publicly traded Indonesian firms. The survey results show that our sample firms seem to have good access to different sources of funds, especially banks and the equity market. There is no evidence that asymmetric information with the banks is a significant problem. The firms expect the banks to fairly assess their future prospects, charge reasonable, if not low, interest rates on loans, and commit to provide resource to the firms in the event of insolvency. There is, however, some support that the firms operate as if there exist an optimal debt ratio. Overall, our results would be consistent with a world of large profitable firms that have good access to major alternative sources of funds, and yet, these firms are willing, for financing at the margin, to use their superior information to their advantage. Our regression results generally confirm the survey data. The excess debt capacity model shows the most satisfactory results.

The Relative Valuation of Socially Responsible Firms: an Exploratory Study

This study provides new evidence on the presence of foreign exchange exposure and foreign exchange risk premia. The results challenge the conclusions of earlier studies which find such exposure insignificant and unpriced. Making no prior assumptions regarding the types of firms exposed to exchange risk and using an APT specification designed to 1) satisfactorily span the domestic factor space, and 2) explicitly incorporate the covariability of exchange rate innovations, we find evidence both of foreign exchange exposure and priced foreign exchange risk premia.

On the valuation of common and preferred shares in Germany: new evidence on the value of voting rights

Various aspects of “corporate social responsibility” (CSR) have recently captured the attention of researchers in the fields of economics and finance (Orlitzky et al. 2003; Statman 2005; Goss and Roberts 2006; Milevsky et al. 2006). This phenomenon follows more than a decade of research and dozens of studies published largely in the strategic management and business ethics literatures which have striven to explore the links between corporate social performance (variously defined) and corporate financial performance (Waddock and Graves 1997; Roman et al. 1999; Margolis and Walsh 2001; Orlitzky and Benjamin 2001). While one interpretation of these studies may be that the evidence for a causal, or even de facto link between social and financial performance remains elusive, another would be that the balance of evidence suggests that enhanced social performance may be a lagging indicator of effective management and therefore a leading indicator of future financial performance (Wheeler 2003). In their 2003 review of 52 studies internationally, Orlitzky and colleagues were somewhat unequivocal in judging the evidence as favoring social responsibility as a more likely benefit than impairment to investors.

An overview of the market for risk management products

Outlines the special characteristics of preferred shares in Germany, notes that ordinary shares are valued at substantially higher figures and presents a study of the pricing of both types for 58 German companies 1990‐1993. Refers to previous research to develop hypotheses on reasons for the common share premium and an explanatory model which is then applied to the data. Finds that larger premiums are associated with higher ownership concentration and lower trading but not to the proportion carrying voting rights or the cumulative preferred dividends in arrears; and that they are significantly reduced if a family or financial institution is a major shareholder. Goes on to show that where a family is the largest blockholder the premium increases with liquidity but for a financial institution, liquidity reduces the premium. Considers the underlying reasons for this and consistency with other research.

Personal Bankruptcy Costs: Their Relevance and Some Estimates

Outlines the development of risk management products, reviews relevant research and identifies reasons for their rapid growth. Reports a study of US public issues of securities from 1962 to 1998 which examines the introduction and longevity of various types; and analyses the issuers and leading underwriters for each and the countries involved. Confirms the important role of banks and financial institutions in the market and shows that Europe is the leading area for the issue of currency securities and demand for both these and interest rate securities. Adds that Japanese underwriters lead in currency securities and US underwriters in interest rate securities. Provides a glossary of technical terms.