Agency Costs of Corporate Risk Management

Abstract

This paper discusses a potential cost of corporate risk management strategies that are based on cash-flow hedging. Cash-flow hedging strategies allow firms to avoid the deadweight costs of external financing by setting their internal cash flows equal to their investment needs. In the presence of agency conflicts between managers and shareholders, these hedging strategies can be used to reduce shareholder wealth, insofar as they remove the valuable discipline that obtaining new external financing imposes on managers.