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原文：
Financial risk
management: is it a value-adding
activity
？
Financial risk management is a process
to deal with the uncertainties
resulting from financial markers. It
involves assessing the financial risks
facing an organization and developing
management strategies consistent with
internal priorities and policies.
Addressing financial risks proactively may
provide an organization with a
competitive advantage. It also ensures that
management, operational staff,
stakeholders, and the board of directors are
in agreement on key issues of
risk.
Considering whether
financial risk management is value-adding.
Although
risk
management
can
reduce
total
risk,
this
may
not
affect
the
cost
of
capital
or firm value. Well-diversified
investors have already eliminated all of the
specific
risk,
and
risk-management
may
be
seen
as
a
zero
NPV
activity
at
best,
and at worst, a value-
reducing activity. However, there is a role for
risk
management.
Reduction
of
total
risk
may
reduce
the
expected
costs
of
financial
distress,
this increases
firm value.
Present a
method of investment
appraisal
that takes account
of total risk through expected financial distress
costs.
Such
a
method
can
result
in
three
possible
decisions
relating
to
a
new
project;
reject the project
invest in the project; and risk-manage; or invest
in the
project but do not risk-manage.
Finally, presents worked examples.
When considering a firm’s financial
risk management activities, we may
ask
two questions; why do firms engage in such
activities, and how do they do
it? How
firms engage in risk-management has been
extensively considered.
Methods
typically
involve
combining
financial
instruments
such
as
shares,
bonds,
options and futures,
in order to obtain a desired payoff profile (see
Smith
and Smithson (1998) for an
excellent analysis).
In
this
paper,
we
consider
the
more
controversial
question;
why
bother
with
financial risk-management? Is financial
risk-management value adding?
Shapiro
and
Titman
(1998)
consider
this
question
of
whether
risk
management
is
desirable.
A
firm’s
total
risk
consists
of
two
elements;
market
risk
(which
measures
the
sensitivity
of
the
firm’s
stock
price
to
market
-wide
movements),
and
specific
risk
(which
measures
the
stock
price
movements
which
are
specific
to
the firm, and independent of market movements).
According to the CAPM and
APT models,
well-diversified investors hold portfolios that
have already
eliminated
all
of
a
firm’s
specific
risk,
but
investors
cannot
eliminate
market
risk. The equilibrium
market price of each firm’
s shares in
the portfolio is
such that expected
returns
only
compensate
investors
for holding market
risk,
as
embodied
in
a
firm’s
beta.
As
such,
risk
-management
activities
by
the
firm
are
irrelevant
in
the
sense
that
they
are
unable
to
add
value.
These
activities
may reduce total
risk, but diversified investors have already done
so by
eliminating all of the specific
risk. Hence, risk management activities will
not increase the market price of the
firm’s shares.
Shapiro and Titman (1998) argue that,
since financial instruments are
fairly
priced, and compensate investors for market risk
only, hedging risk
through financial
instruments is, at best, a zero net present value
(NPV)
activity.
In
the
worst
scenario,
risk
management
may
actually
be
value
reducing,
since it may be a
costly activity in terms of time and resources.
Risk
management
irrelevance
can
be
analysed
as
follows.
Consider
the
value
of the
firm as the sum of the discounted value of
expected future cashflows.
That is, if
the firm is expecting cashflows of X1 in year i,
and the firm
discounts at a cost of
capital r, then firm value V is given by:
V
1
=X
1
/(1+r)
+
X
2
/(1+r)^2+
…
(1) The cost of capital (or the
investors
’
required return)
includes an element for market risk.
The
firm’s risk management activities
reduce total risk, but this will not
affect the market risk. Therefore, the
firm’s beta will be unchanged, and
hence the cost of capital
r will remain
the same.
Having
demonstrated how risk management may be (at best)
an irrelevant
activity,
Sheperd
and
Titman
(1998)
proceed
to
rescue
risk
management
by
showing
that
it
can
have
an
effect
on
firm
value.
They
argue
that
total
risk
does
matter,
through its effects on the cashflows. A
high level of total risk may increase
expectations
of
financial
distress,
hence
reducing
the
expected
cashflows,
and
reducing firm value. Risk management
aimed at reducing total risk, although
not affecting the discount
rate,
may increase
expected cashflows, which
would
be value
increasing.
Furthe
rmore, a firm’s
managers have an incentive to engage in risk
management, even if this is not value
increasing. A single firm’s financial
distress may not be of much concern for
a well-diversified investor. However,
it could be disastrous for the
management of that firm, in terms of loss of
employment and reputation. It may be
argued that management has a private
discount
rate
which
reflects
total
risk,
and
hence
exceeds
the
social
discount
rate r. Since the firm is valued in the
market using r, the management would
have a lower private valuation of the
firm than the market. Risk management
could then be viewed as management’s
attempts to increase their private
valuation towards the market
valuation.
Should we adjust
the discount rate?
Shimko
(2001) argues that well-diversified investors do
not exist.
Therefore,
the
NPV
method
of
investment
appraisal
may
be
flawed,
since
it
uses
a discount rate that only reflects
market risk. He proposes an adjustment to
the
NPV
method
in
order
to
take
account
of
total
risk.
His
risk-adjusted
present
value (RPV) method attacks the problem
by adjusting the discount rate.
Shimko’s RPV approach is derived as
follows.
Consider a one
period investment project with present value
V
1
at time 0
(this
is
the
amount
that
the
investor
is
prepared
to
pay
at
time
0,
and
is
defined
as cash capital). The time 1 cashflow
provided by the project is a normally
distributed
random
variable
with
mean
μ
1
and
standard
deviation
σ
1.
Shimko
assumes that the
cashflow is not correlated with any market risk
factors. The
risk-free rate is
r.
The investor requires a
return on his/her cash capital and his/her risk
capital. Risk capital is the maximum
amount that the investor might lose on
the
project
over
the
year.
In
order
to
derive
risk
capital,
the
firm
must
define
a “worst case” time 1 cashflow,
W
1
=
μ
1
? is, the worst case cashflow is
z
standard
deviations
below
the
mean.
The
present
value
of
the
worst
case
cashflow
is W
0
=W
1
/
(1+r). Hence, risk capital =V
0
?W
0
.
The expected capital gain over the year
is: μ
1
-V=r*V
0
+k*(V
0
-W
0<
/p>
) (2)
The left-
hand side shows that the expected capital gain is
the expected
time 1 value (that is, the
mean) minus the initial cash investment. The
right-hand side partitions this
expected gain into the return on cash capital
r*V
0
plus the
return on risk capital k* (V
0
?W
0
).
Shimko re-arranges (2) to provide the
following formulation:
V
0
=
μ
1
/ (1+r)
–
(k/
(1+r+k))*(z*
σ
1
/
(1+r)) (3)
This suggests
that the value of the project equals its NPV value
minus a
risk charge that is
proportional to the difference between the
expected value
and the worst case
value.
“
The
project
’
s cash flows are not
correlated
”
Note
that, since it is assumed that the project’s
cashflows are not
correlated with the
market, the NPV is found by discounting the
expected
cashflow at the risk-free
rate. Shimko points out that we obtain the NPV
formulation,
V
0
=μ
1
/
(1+
r
), as a special case
when k= 0. Furthermore, as k=
≥
∞ the value of the asset approaches its
worst case value
W
0
. Hence, the
value
of the asset is affected by total
risk, and particularly the value-at-
risk.
This approach
emphasises that, when there are limitations to
portfolio
diversification, investors
(and managers) become concerned with total risk.
The RPV method allows us
to
focus on a
crucial element
of risk management;
the
value-at-risk.
A
potential
drawback
is
that
the
value
V
0
is
affected
by
different
agents’
private
valuations,
either
through
k,
or
through
the
choice
of
W
0
(since
this choice affects
z). Indeed, the author presents numerical examples
that
show
that
NPV
valuation
can
be
much
greater
than
the
subjective
RPV
valuation.
Therefore, using
RPV could
have serious
problems
for investment appraisal.
It
is possible that the RPV
method could lead to incorrect project
acceptance/rejection
decisions.
It is better to
adjust the cashflows!
In
this
section,
we
provide
an
approach
to
investment
appraisal
based
upon
Shapiro and Titman (1998) rather than
Shimko (2001). The goal of investment
appraisal is to identify and accept
value-increasing projects. This method
should
reflect
the
market
valuation
of
the
project.
If
we
assume
that
the
CAPM
formulation
is
robust,
and
that
investors
are
only
rewarded
for
holding
market
risk, it is better to
adjust the cash-flows rather than the discount
rate. In
our analysis, we retain the
idea of value-at-risk, specifically relating it
to financial distress.
Consider a one period investment
opportunity that requires investment of
l at time 0. The time 1 cashflow X
is normally distributed, with mean μ1
and
standard deviation σ1. Furthermore,
if the realised cashflow is le
ss than
l,
the firm faces financial distress.
This carries a cost of F, where F reflects
disruption to services, loss of
reputation, legal costs and so forth. The
expected
cost
of
financial
distress
is
E
(F)
=F
*
Pr
ob{X
<
l}.
In
our
subsequent
worked example,
we show that calculation of E
(F) is straightforward.
The cost of capital k
reflects market (not total) risk. The
project’s
present
value
equals
the
present
value
of
expected
cashflows
minus
the
present
value of financial distress costs:
V
0
=
μ
1
/ (1+k)
–
E
(F)/ (1+k) (4)
Note
that
this
is
analogous
to
the
RPV
formulation
(3).
Like
the
RPV
model,
our valuation formula
takes account of the value-at-risk. However, we
explicitly
model
this
as
financial
distress,
and
we
introduce
it
in
the
cashflow,
rather than the discount
rate.
The NPV formula is:
NPV=-l+
(
μ
1
-E
(F))/ (1+k) (5)
The
firm
takes
the
project
if
NPV
≥
0,
since
this
will
be
value
-increasing.
Like the RPV model, we can incorporate
private valuations through the E
(F)
term. Let F represent the costs of financial
distress to well-diversified
investors,
and
let
Fm
represent
the
costs
of
financial
distress
to
the
firm’s
management.
Due
to
the
arguments
relating
to
well-
diversified
investors
versus
non-diversified
managers
set
out
previously,
we
would
expect
Fm
>F.
Management
may be tempted to incorporate the
expected value E
(Fm) into
the NPV formula
such that:
NPVm=-l*(
μ
1
-E
μ
(F))/ (1+k)
If
NPVm
<
0
<
NPV,
self-interested
management
may
reject
a
value-
increasing
project. We do not pursue
this avenue in this paper. Instead, we assume that
managers act in the interests of
shareholders.
“
Sufficiently to eliminate
financial distress
”
Risk-management and its effect on firm
value
Assume
that
management
can
spend
an
amount
C
on
risk-
management
activities.
Furthermore, assume that this activity
reduces total risk sufficiently to
eliminate financial distress.
If
the management takes
the project and
carries
out risk-management activities, the NPV
will be:
NPV=-l-C+
1
/ (1+k), (7) where the
subscript rm signifies NPV after
risk-
management.
If
the
management
takes
the
project
and
does
not
carry
out
risk
management
activities, NPV
is given by (5).
Note
that
NPVrm
>
NPV
if
E
(F)/
(1
+
k)
>
C.
This
means
that
risk
management
activities
are
worthwhile
if
the
elimination
of
the
present
value
of
financial
distress
costs
exceeds
the
expenditure
required
on
risk
management
activities.
The
project acceptance and
risk
management decision
rules
are as follows:
Take the
project, and risk manage if NPVrm>0, and
NPVrm>NPV.
Risk-management activities
are value-adding, and the project has a positive
NPV after such activities.
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