Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 843: Exposure-Based Cash-Flow-at-Risk for Value-Creating Risk Management under Macroeconomic Uncertainty

Niclas Andrén, Håkan Jankensgård and Lars Oxelheim ()
Additional contact information
Niclas Andrén: Department of Business Administration, Postal: Lund University, Sweden
Håkan Jankensgård: Department of Business Administration, Postal: Lund University, Sweden
Lars Oxelheim: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden, and Lund university

Abstract: A strategically minded CFO will realize that strategic corporate risk management is about finding the right balance between risk prevention and proactive value generation. Efficient risk and performance management requires adequate assessment of risk and risk exposures on the one hand and performance on the other. Properly designed, a risk measure should provide information on to what extend the firm's performance is at risk, what is causing that risk, the relative importance of non-value-adding and value-adding risk, and the possibilities to use risk management to reduce total risk. In this chapter, we present an approach – exposure-based cash-flow-at-risk – to calculating a firm's downside risk conditional on the firm's exposure to non-value-adding macroeconomic and market risk and to analyzing corporate performance adjusted for the impact of non-value-adding risk.

Keywords: Cash-flow-at risk; Value at risk; Risk management; Value creation; Total risk

JEL-codes: E32; G32; G33; G34; M16; M21

27 pages, June 21, 2010

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