Jifeng Yu

Enterprise Risk Management: Strategic Antecedents, Risk Integration and Performance

The current literature on the adoption of enterprise risk management (ERM) abstracts from the issue of its strategic context. Accounting for the interplay between ERM and various individual risk management (IRM) practices, this paper presents a theoretical basis to study the strategic determinants, risk integration, and value creation of ERM. We tested hypotheses with data from the US property and casualty (PC) insurance industry. Our results show that insurers with more reinsurance purchase and greater geographic diversification are more likely to adopt ERM. After ERM initiation, the magnitude of certain IRM adjustments is substantial. Interestingly, the market responds negatively to ERM adoption. ERM displays a strong negative correlation with firm value with a discount of 5% (4%) in terms of Tobins Q (ROA).

Managing Capital Market and Longevity Risks in a Defined Benefit Pension Plan

This paper proposes a model for a defined benefit pension plan to minimize total funding variation while controlling expected total pension cost and funding downside risk throughout the life of a pension cohort. With this setup, we first investigate the plan’s optimal contribution and asset allocation strategies, given the projection of stochastic asset returns and random mortality evolutions. To manage longevity risk, the plan can use either the ground-up hedging strategy or the excess-risk hedging strategy. Our numerical examples demonstrate that the plan transfers more unexpected longevity risk with the excess-risk strategy due to its lower total hedge cost and more attractive structure.

Downside Risk Management of a Defined Benefit Plan Considering Longevity Basis Risk

To control downside risk of a defined benefit pension plan arising from unexpected mortality improvements and severe market turbulence, this article proposes an optimization model by imposing two conditional value at risk constraints to control tail risks of pension funding status and total pension costs. With this setup, we further examine two longevity risk hedging strategies subject to basis risk. While the existing literature suggests that the excess-risk hedging strategy is more attractive than the ground-up hedging strategy as the latter is more capital intensive and expensive, our numerical examples show that the excess-risk hedging strategy is much more vulnerable to longevity basis risk, which limits its applications for pension longevity risk management. Hence, our findings provide important insight on the effect of basis risk on longevity hedging strategies.

Pension Risk Management in the Enterprise Risk Management Framework

This paper presents an enterprise risk management (ERM) model for a firm that is composed of a portfolio of capital investment projects and a defined benefit (DB) plan for its workforce. The firm faces the project, operational and hazard risks from its investment projects as well as the financial and longevity risks from its DB plan. The firm maximizes its capital market value net of pension contributions subject to constraints that control project, operational, hazard, financial and longevity risks as well as an overall risk. The analysis illustrates the importance of integrating pension risk into the firm’s ERM program by comparing firm value with and without integrating pension risk with other risks in an ERM program. We also show how pension hedging strategies can impact the firm’s net value under the ERM framework. While the existing literature suggests that a longevity swap is less expensive than a pension buy-out because the latter is more capital intensive, this analysis shows that the buy-out is more effective in increasing firm value.

Corporate Pensions and the Maturity Structure of Debt

In this paper, we investigate the role of pension obligations, the most significant off-balance-sheet item, in determining corporate debt maturity and spreads. We begin by showing a significant and robust positive relationship between pension liabilities and corporate short-term debt ratio. We also find that more pension obligations cause a significant increase in the cost of debt, but this effect is mitigated by short-maturity debt. Overall, our study shows that short-term debt can reduce asymmetric information costs related to pensions.

Institutional and Economic Influences on Internet Adoption and Accelerated Firm Internationalization

Accelerated internationalization occurs when a firm engages in international business early in its life cycle or when it builds international business experience with great speed, perhaps incorporating international activities in more parts of the firms value chain than has occurred historically. Such acceleration seems to have been occurring since the late 1980s, and evidence indicates that it is not a temporary or abnormal phenomenon (Organisation for Economic co-operation and development (OECD), 1997). Many firms around the world experienced an era of accelerated internationalization in the 1990s (OECD, 1997) and many are continuing to do so.

Periphery, Overlap, and Subunit Exit in Multiunit Firms

Existing studies on subunit power largely rely on the premise that a firm’s subunits are connected through resource exchanges. In this study, we introduce two novel constructs—market periphery and market overlap—to capture the power of subunits that do not directly involve resource exchanges. Drawing on resource dependence theory, we advance a subunit power approach to argue that the dependence of the firm on its subunits for sales can help predict headquarters’ decision on subunit exits in the form of divestiture, dissolution, or spin-off. Using subunit data of a population of U.S. insurance groups in a longitudinal setting, we find that market periphery and overlap increase the hazard of subunit exit. However, a subunit’s relative sales growth reduces the positive effect of overlap on its hazard of exit, whereas external linkage lessens the positive effect of periphery on its hazard of exit.