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Hedging and Coordinated Risk Management: Evidence from Thrift Conversions
Author(s) -
Schrand Catherine,
Unal Haluk
Publication year - 1998
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00041
Subject(s) - economic rent , risk management , incentive , business , credit risk , stock (firearms) , financial risk management , economics , actuarial science , monetary economics , finance , microeconomics , mechanical engineering , engineering
ABSTRACT We provide an explanation for hedging as a means of allocating rather than reducing risk. We argue that when increases in total risk are costly, firms optimally allocate risk by reducing (increasing) exposure to risks that provide zero (positive) economic rents. Our evidence shows that mutual thrifts that convert to stock institutions increase total risk following conversion, consistent with their increased abilities and incentives for risk taking. They achieve this increase by hedging interest‐rate risk and increasing credit risk. We provide some evidence that risk‐management activities are related to growth capacity and management compensation structure attained at conversion.