Managing the Invisible: Measuring Risk, Managing Capital, Maximizing Value
20 Pages Posted: 12 Jul 2006
Date Written: March 2006
Abstract
Enterprise Risk Management (ERM) is a body of knowledge - concepts, methods, and techniques - that enables a firm to understand, measure, and manage its overall risk so as to maximize the firm's value to shareholders and policyholders. The purpose of this paper is to demonstrate this often-asserted but seldom-described linkage between ERM on the one hand, and maximizing a firm's value on the other. In Part 1 I argue that ERM, by measuring the firm's aggregate risk exposure, enables the firm's managers to identify and choose value-maximizing combinations of risk and capital. In Part 2 I describe and critique the rules of thumb that CFO's typically rely on to make critical decisions concerning the firm's capital structure, and propose value maximization as an alternative. Part 3 describes alternative approaches to valuing a firm, and Part 4 presents a valuation model for a property-casualty firm. Part 5 shows how this valuation model can assist managers in making value-maximizing strategic decisions, and Part 6 emphasizes the substantial importance to insurance executives of value-focused ERM, which makes the value of the firm both visible and manageable.
Keywords: Enterprise Risk Management, ERM, franchise value, valuation, capital structure, optimization, property-casualty
JEL Classification: G22, G32
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Explaining the Rate Spread on Corporate Bonds
By Edwin J. Elton, Martin J. Gruber, ...
-
The Determinants of Credit Spread Changes
By Pierre Collin-dufresne, J. Spencer Martin, ...
-
How Much of Corporate-Treasury Yield Spread is Due to Credit Risk?
By Jing-zhi Huang and Ming Huang
-
How Much of the Corporate-Treasury Yield Spread is Due to Credit Risk?
By Jing-zhi Huang and Ming Huang
-
How Much of the Corporate-Treasury Yield Spread is Due to Credit Risk?
By Jing-zhi Huang and Ming Huang
-
Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit-Default Swap Market
By Francis A. Longstaff, Sanjay Mithal, ...
-
Equity Volatility and Corporate Bond Yields
By John Y. Campbell and Glen B. Taksler
-
Equity Volatility and Corporate Bond Yields
By John Y. Campbell and Glen B. Taksler
-
Structural Models of Corporate Bond Pricing: An Empirical Analysis
By Young Ho Eom, Jing-zhi Huang, ...
-
By Roberto Blanco, Simon Brennan, ...