Discussion Issues and Derivations

  1. Where is the value added from risk management?
    The value added from risk management for firms with diversified investors comes from two sources.
    a. There might be tax benefits that can be gained from managing risk and smoothing income
    b. There might also be an increase in debt capacity which increases value
    For closely held and private firms there might be an additional benefit accruing from the reduction of risk that would be viewed as diversifiable risk by a diversified investor but is not diversifiable to the owners of these firms.
  2. What types of firms will gain the most from risk management?
    I would expect small, closely held firms and private firms to gain the most from risk management. In addition, I would expect firms which use their debt capacity to the utmost to gain from risk management.