Risk management critical to corporate strategy

January 7, 2009

With the consequences of the current financial crisis spreading to the real economy, lawmakers are exploring new regulations to govern the financial markets. The concern among market participants is that policy-makers do not fully understand how risk management does and should work, and how derivatives can be beneficial.

In the "MIT Roundtable on Corporate Risk Management" that appears in the Fall 2008 issue of Morgan Stanley's Journal of Applied Corporate Finance, a distinguished group of academics and practitioners assess how risk management affects corporate growth and value.

For many companies, effective corporate risk management begins with an equity cushion in the capital structure. This helps to avoid raising prohibitively expensive capital following an adverse event. Excessive leverage contributed to the problems of many banks, leading to the current industry-wide de-leveraging.

Andrew Lo, Professor of Finance at the MIT Sloan School of Management and director of MIT's Laboratory for Financial Engineering, contends that too often what passes for risk management at many financial companies is really risk measurement. This offers little prescriptive advice on how to actually manage the risks, as opposed to corporate governance structures for actively and effectively managing risks. In addition, some of the current problems can be attributed to the failure of risk managers and their models to account for highly improbable events.

A paradox of risk-reducing financial innovation is that it tends to encourage market participants to increase risk-taking in other ways. Robert Merton of Harvard Business School and Nobel laureate in economics points out that the challenge from a regulatory standpoint is to find the right balance between these two offsetting forces.

Source: Wiley

Explore further: Call for greater focus on risks of toxic mixtures

Related Stories

The vibrant tapestry of social networks

September 15, 2015

It takes two human beings to create another human being. Known as a dyad, the smallest possible social unit, it is the first social network we are acquainted with. As we grow up, the networks we develop from school, work ...

With time ticking, quake warning system begins to take shape

September 11, 2015

University of Washington researchers are testing an earthquake alert system as the Pacific Northwest prepares for the day when a 600-mile-long fault line looming off the coast unleashes a catastrophic earthquake and tsunami.

Recommended for you

Ancient genome from Africa sequenced for the first time

October 8, 2015

The first ancient human genome from Africa to be sequenced has revealed that a wave of migration back into Africa from Western Eurasia around 3,000 years ago was up to twice as significant as previously thought, and affected ...

Rare braincase provides insight into dinosaur brain

October 8, 2015

Experts have described one of the most complete sauropod dinosaur braincases ever found in Europe. The find could help scientists uncover some of the mysteries of how dinosaur brains operated, including their intellectual ...

How much for that Nobel prize in the window?

October 3, 2015

No need to make peace in the Middle East, resolve one of science's great mysteries or pen a masterpiece: the easiest way to get yourself a Nobel prize may be to buy one.

The dark side of Nobel prizewinning research

October 4, 2015

Think of the Nobel prizes and you think of groundbreaking research bettering mankind, but the awards have also honoured some quite unhumanitarian inventions such as chemical weapons, DDT and lobotomies.


Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.