Based on a theoretical model, this paper shows that risk management policies shielding firms from marketwide risk exposures could be harmful to the firms. Specifically, if a firm's operation is delegated to a manager and subject to moral hazard problems, risk exposures could align the manager's interests with the firm owner's so that they alleviate the moral hazard problems and raise the firm's value. As a result, the risk management policies could reduce the firm's value to the owner.
Risk ManagementDynamic ContractsMoral Hazard
Rui Li
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College of Management, University of Massachusetts Boston, 100 William T Mor-rissey Blvd, Boston, MA 02125, USA
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