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70 RISK MANAGEMENT AND VALUE CREATION IN FINANCIAL INSTITUTIONS
Changes in operations scenarios:
Value-creating scenario (➒ in Table 3.1): This is a direct analogue to
scenario ❼ for specific risk (1).
Value-creating scenario (❿ in Table 3.1): This is a direct analogue to
scenario ➏ for systematic risk(2).
Besides the above-mentioned arguments for corporate risk management,
some companies claim to manage risks in order to best fit the wants and
needs of certain shareholder clienteles. 79 However, the variation in the goals
of such policies is wide—both within and across industries. 80 For instance,
one gold-mining company states in its annual report that its “unique goldhedging
program offers investors a predictable, rising earnings profile in the
future”, 81 trying to guarantee a certain company risk profile. Another goldmining
company states, to the contrary, that its “no-hedging policy permits
shareholders to capture the full benefit of increases in the price of gold” 82
by giving them more exposure to gold prices than other companies in
the same industry. As long as we assume neoclassical markets and welldiversified
investors, these risk-management policies for shareholder clienteles
are irrelevant.
Let us first consider specific risk. Since investors can diversify those risks
easily and because those risks are not compensated by capital markets for
holding them, investors will be indifferent vis-à-vis this kind of risk, no matter
whether a company provides more or less specific risk. Besides, scenarios ❶,
❷, ➎, ❼, and ➒ need to be considered to evaluate the exact effect on value.
Let us now turn towards systematic risk. If a firm tries to eliminate or
create systematic risk, shareholders can buy or sell it in the market at the
same fair market price on their own. Therefore the clientele argument used,
for example, by Homestake is incorrect in perfect financial markets, because
it cannot create value for investors. Again, scenarios ❸, ❹, ➏, ❽, and ❿ need
to be considered in order to draw exact conclusions as to whether value is
created by such actions.
Summary and Implications
We can summarize the economic insights that we derived under the strict
assumptions of the neoclassical world in the previous sections as follows:
79 See Stulz (2000), pp. 2-41+.
80 For an extensive discussion of the risk-management policies in North American
gold-mining corporations, see Tufano (1996).
81 See Stulz (2000), pp. 2-2 and 2-53.
82 Homestake (1990), p. 12.