Håkan Jankensgård

Cash-Flow-at-Risk and Debt Capacity

Value-at-Risk (VaR), which indicates the loss in value associated with a certain probability, is a widely used risk measure among financial institutions. Cash-Flow-at-Risk (CFaR) is an attempt to transfer the same ideas to the setting of a non-financial firm. In this paper I argue that at-Risk measures, in the context of corporate liquidity risk management, would benefit from an explicit and more thoughtful treatment of the firms debt capacity. By so doing one obtains risk measures that can provide information on outcomes that are identified as costly by the risk management literature, in particular underinvestment due to financing constraints. Since assessing such outcomes requires information on the firms presumed access to external sources of funding, what is called for is a framework in which cash flow-based measures of risk are conditional on the firms debt capacity. The group of risk measures presented in this paper incorporates this information. They render hedgeable magnitudes that can inform risk management strategies by indicating if a hedge is likely to mitigate costly consequences of volatility by acting as a substitute for equity capital.

The Investor-Base Hypothesis of Stock Return Volatility: Empirical Evidence

A conjecture in the literature holds that a large and diversified investor base leads to lower volatility by improving the quality of the price signal. In this paper this hypothesis is examined using unique Swedish ownership data. The data does not support the conjecture. Instead, volatility increases in the number of investors and in the size of the firm’s micro-float (the fraction of shares held by investors with stakes below 0.1%). In separate regressions we show that trading volume increases in the size of the investor base, suggesting a trading channel explanation. We also show that proxies for the portfolio concentration of the largest owners are important. We conclude that ownership structure has major implications for stock return volatility.

Why FX Risk Management Is Broken – And What Boards Need to Know to Fix It

In this paper we challenge the role of Foreign Exchange Risk Management (FXRM) in corporate management. We believe it is fair to characterize FXRM, on the whole, as a legacy activity rather than something that reflects a realistic cost-benefit analysis at the enterprise-level. The Board of Directors, as the designated guardians of the interests of shareholders, has a key role in setting the firm on a path towards a cost-efficient and centralized FXRM that preserves the firm’s transparency and predictability towards the investor community. A policy conclusion from our analysis is that responsibility for FX policy should shift from the traditional Finance/Treasury orientation to a group risk function (e.g. a Chief Risk Officer) supported by a risk committee dedicated to integrated risk management.

Ownership Determinants of Stock Return Volatility

A conjecture in the literature holds that a large and diversified investor base leads to lower volatility by improving the quality of the price signal. In this paper this hypothesis is examined using unique Swedish ownership data. The data does not support the conjecture. Instead, volatility increases in the number of investors and in the size of the firm’s micro-float (the fraction of shares held by investors with stakes below 0.1%). In separate regressions we show that trading volume increases in the size of the investor base, suggesting a trading channel explanation. We also show that proxies for the portfolio concentration of the largest owners are important. We conclude that ownership structure has major implications for stock return volatility.

Risk Incentives, CEO Age, and Hedging Strategy

This study tests if managerial preferences explain how firms hedge, i.e. how they choose between linear contracts and put options, and if they finance these hedging positions with cash-on-hand or by selling upside (call options). Using hand-collected data on derivative portfolios we characterize hedging strategies in the oil and gas industry. Our main findings are that the likelihood of being a hedger increases with CEO age, and that near-retirement CEOs prefer linear hedging instruments. This suggests that these CEOs place a premium on the additional certainty that comes with linear strategies. The predictions of the managerial risk incentives-theory of hedging strategy, according to which managers with convex compensation schemes would avoid hedging strategies that cap upside potential, find no support in the data. Our findings on managerial preferences add to previous literature emphasizing non-linear exposures and financial status as determinants of hedging strategy.

A Tide of Cash: Corporate Governance and the Management of Large Cash Windfalls

In this paper we revisit the contentious issue of whether corporate governance arrangements influence corporate cash holdings. We use the exogenous cash windfalls in the oil industry during the 2000s to test the power of three governance dimensions (managerial entrenchment, board independence and ownership) in explaining differences in cash management policies. Between 2000 and 2008 the oil price successively reached new record levels, and by 2008 its yearly average had increased by more than 200% compared to the 2000-2003 period, resulting in substantial cash windfalls in oil firms. We document that firms with a classified board have higher cash holdings. They also return less money to shareholders through share repurchases and have lower investment rates. Importantly, the tendencies to underinvest and withhold share repurchases got stronger over time as the cash windfalls materialized in the industry. In the years 2007-2008, when oil prices and share repurchases peaked, firms with a classified board engaged less in repurchases and increased cash holdings compared to other firms. Classifiedboard firms also exhibit a higher cash-sensitivity to lagged windfalls. Overall, the analysis in this paper provides strong support for the managerial risk aversion-theory of excess cash holdings, and suggests that a classified board is the key governance-characteristic associated with a conservative cash management policy.