Abstract
This paper examines the impact of corporate risk management strategies, namely, (1) financial, (2) operational, and (3) enterprise risk management on firm value in the context of an emerging market, Turkey. We use a unique hand-collected sample of non-financial Turkish companies for the years 2010–2015 and use mixed research methods to gain insights into the complex relationship between risk management and firm value. The quantitative methodology is accompanied by a follow up qualitative study that involves in-depth interviews with selected finance and risk management professionals. Results surprisingly reveal that none of the three risk management strategies increase firm value. We explore how the different institutional circumstances surrounding firms moderate the relationship between risk management and firm value and derive some policy implications for authorities in emerging markets regarding improving disclosures on risk management and corporate governance.
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Notes
Turkish lira lost 80% in value against USD between the years 2010 and 2015 (World Bank 2017).
Pure risks are hazard risks which are insurable and there is no possibility of gain. Examples include property and liability risks.
It is verified that the excluded firms, which do not conduct exports and imports, do not perform any kind of corporate hedging activities such as interest rate hedging, commodity price hedging, or ERM. Therefore, excluding them does not bias our results. We thank an anonymous referee for this insight.
Turkish companies started implementing IFRS 7 since 2007 which requires firms to apply hedge accounting. Specifically, they are required to explicitly disclose how they hedge their risk exposures and they need to show such exposures separately for the financial instruments held for trading and speculation. Therefore, we rely on the information on the financial instruments provided in the annual reports while we exclude the use of derivatives for speculation purposes.
As shown in Chung and Pruitt (1994), there is a high degree of correlation between these simple constructions of Tobin’s Q and more rigorous approximations.
We use the net position of derivatives that are hedging opposite positions.
IFRS 7 requires Turkish companies to disclose the different types of instruments that are used to hedge market risk which is provided separately for currency risk, interest rate risk, and commodity price risk. Therefore, we were able to collect the extent of hedging information separately for those types of market risk from annual reports.
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Appendix 1: interview questions
Appendix 1: interview questions
1. Do you conduct risk management activities at your company? What kind of risk management activities do you perform and what are their objectives? |
(a) How do you manage your financial risks? Do you use financial derivative instruments? |
(b) Do you implement Enterprise Risk Management (ERM) activities? If so, when did you start performing ERM at your company? |
(c) How do you manage your operational risks? |
2. Could you explain the organizational structure of risk management function at your company? Which department is responsible for what type of activities? How are they followed up and supervised? |
3. Could you explain the motives behind different types of corporate risk management activities held in your company? How about other Turkish companies and other emerging markets? Would the motives differ for developed markets? |
4. Do you think investors in Turkey consider the risk management activities of Turkish companies in their investment decisions? |
5. How do you disclose the risk management activities held by your company? What are the legal requirements for risk management disclosures? What differences do you see in the risk management disclosures between Turkey and the developed countries? |
6. What do you think should be done to improve the corporate risk management functions in Turkey? |
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Danisman, G.O., Demirel, P. Corporate risk management practices and firm value in an emerging market: a mixed methods approach. Risk Manag 21, 19–47 (2019). https://doi.org/10.1057/s41283-018-0040-5
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DOI: https://doi.org/10.1057/s41283-018-0040-5