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Choice of corporate risk management tools under moral hazard

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    SYSNO ASEP0039384
    Document TypeJ - Journal Article
    R&D Document TypeJournal Article
    Subsidiary JOstatní články
    TitleChoice of corporate risk management tools under moral hazard
    TitleVýběr nástrojů pro řízení operačního rizika za subjektivního rizika
    Author(s) Bena, Jan (NHU-N)
    Source TitleCERGE-EI Working Paper Series - ISSN 1211-3298
    -, č. 298 (2006), s. 1-43
    Number of pages43 s.
    Publication formWWW - WWW
    Languageeng - English
    CountryCZ - Czech Republic
    Keywordsrisk management ; corporate insurance ; moral hazard
    Subject RIVAH - Economics
    R&D ProjectsLC542 GA MŠMT - Ministry of Education, Youth and Sports (MEYS)
    CEZAV0Z70850503 - NHU-N (2005-2011)
    AnnotationThis paper examines the choice of tools for managing a firm’s operational risks: cash reserves, insurance contracts, and financial assets under an optimal financing contract that solves moral hazard between insiders and outside investors. Risk management is valuable as it reduces the costs of raising external financing, increases debt capacity, lessens underinvestment, and improves welfare. I show that insurance is superior as it facilitates the outside financing relationship but leads to inefficient excessive continuation if used without coverage limits. When insurance against an operational risk is not available, the firm uses financial assets instead or resorts to holding cash reserves.
    WorkplaceEconomics Institute
    ContactTomáš Pavela, pavela@cerge-ei.cz, Tel.: 224 005 122
    Year of Publishing2007
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