The relationship between financial risk management and shareholders value

Abstract

The aim of this thesis is to investigate the relationship between financial risk management (or hedging), the underinvestment problem and the increase in shareholders and firm value. To do so, we will present first the different theories and supporting evidence for the value generation capability of hedging strategies (i.e by generating tax benefits, reducing distress costs, reducing the underinvestment problemt). Moving on, we will provide a theoretical introduction to the concepts of risk, exposure, and risk management, and then we will review different schools of thought of risk management, more specifically the financial risk management, the strategic risk taking and the enterprise risk management (ERM). In the following chapter the focus will be on what different risk management strategies are implemented in the practic for hedging financial risks (interest rate, exchange rate, commodity prices), from those relying only on the use of financial instruments like derivatives, to those using operational hedges to conclude with those using a combination of boht, exploiting also the benefits of extra liquidity. The final chapter is where we will try to investigate the relationship between the use of hedging derivatives and the investment spending of italian companies from different industry sectors. After investigating that, we will see for which companies there is an effective increase in shareholders value, using a metric proposed by P. Fernandez. Our research tries to combine two different analysis to establish a potentially useful relationship also for the practice.