Håkan Jankensgård

• Lund University

In this paper we test the hypothesis that CEO narcissism influences firms’ hedging behaviour. Unlike rare but transformative events like acquisitions, derivative usage offers the narcissistic manager a convenient stage for bold and decisive action that generates a continuous supply of attention. It therefore represents a compelling setting for inve...

We examine how firms hedge in financial distress. Using hand‐collected data from oil and gas producers, we find that these firms hedge oil prices during periods of financial distress. Derivative portfolios in these firms are characterized by short put options. These positions are part of a composite three‐way (3W) collar strategy that combines buyi...

How firms cope with tail risk is an under researched problem in the literature on corporate risk management. This paper presents stylized facts on the nature of revenue shocks based on 65 years worth of Compustat data. We define a Black Swan as an unexpected year-on-year drop in revenue between 30-90%. The rate of Black Swans has increased markedly...

In this paper we test the hypothesis that CEO narcissism influences firms' hedging behaviour. Our empirical evidence, based on hand-collected data on derivative positions in the U.S. oil and gas industry, suggests that firms with a narcissistic CEO hedge more selectively. Furthermore, we find that these firms reduce selective hedging comparatively...

According to previous research, firms prefer to temporarily maintain unutilized resources when business activity decreases, thereby reducing future 'congestion costs' that occur when revenue growth resumes. We argue that such optimizing behaviour-referred to in the literature as sticky costs-is conditional on financial resources that support the in...

In this book, my coauthor Petter Kapstad and I ask why some ERM-programmes end up as box-checking silos with almost no connection to important decision-making processes, whereas others are empowered and end up having a profound impact on the firm’s culture, governance structures, and strategy process. We establish a path to empowered ERM by drawing...

According to an influential argument, corporate hedging supports corporate investment when internal cash flows are volatile and external financing is costly (Froot, Scharfstein and Stein, 1993). Despite its vast influence, the predictions of this theory have not yet been directly tested using actual derivative cash flows. This study uses hand-colle...

Firms, in their quest to manage the multiple performance indicators, often face trade‐offs: the instruments used to manage a cash flow exposure often have unintended effects on net income because they have to be either translated or fair valued. This chapter tackles these issues straight on. It looks at how the need to translate certain assets and...

One of the more puzzling questions facing corporate management is the risk management decision. This is about deciding whether to use a company's resources to actively try to reduce risk, which is understood as variability in corporate performance. This chapter explores when it makes sense for a firm to reduce variability in its performance through...

In this chapter, the authors focus on how translation GLs travel through the firm's financial statements. To reduce heavy terminology, they label translation GLs that appear in net income as ‘FXGL’ and those in comprehensive income as ‘CTGL’, where CT stands for ‘currency translation’. The CTGL performs four functions designed to make sure that the...

Virtually any organisation active in the global economy is impacted by fluctuations in foreign exchange (FX or ForEx) markets. Managers need to understand this increasingly complex issue and measure their firm’s exposure to risk. Corporate Foreign Exchange Risk Management is an in-depth yet accessible guide on effective ForEx exposure management. D...

Derivatives are financial instruments whose value derives from an underlying reference variable or price. Surveys of corporations show that a significant majority of firms with exposure to exchange rates use foreign exchange (FX) derivatives. This chapter divides FX derivatives into three categories: forward/futures, swaps, and options. The first t...

Foreign exchange risk management (FXRM) should be part of a broader framework for managing the firm's risk and return in a holistic manner. FXRM as a silo activity is getting increasingly difficult to defend. In a nutshell, exposures should be managed so as to keep the risk of breaching critical performance thresholds at acceptable levels, whilst m...

A good place to start in the quest for a solid understanding of how performance relates to exchange rates is the firm's commercial exposure. This chapter describes concepts and methods that can be used in quantifying a firm's commercial exposure to exchange rates. Managers regularly cite frustration with the quality of exposure information as a top...

This chapter argues that a corporate group should pursue a largely centralized approach to foreign exchange risk management (FXRM). A centralized FXRM also implies that financing and capital structure policy is determined by headquarters, not in the business units. The advantages of a centralized form of FXRM are simply too great to ignore. Central...

One of the most important trends in corporate risk management is the rise of integrated approaches to managing risk, such as the increasingly popular enterprise risk management. Centralizing foreign exchange risk management (FXRM) is not enough for integrated risk management (IRM) to happen, however. It is quite possible to have a fully centralized...

Communicating foreign exchange risk management (FXRM) is important for several reasons. It is part of the organization's broader policy for disclosing information, which is what helps bridge the information asymmetry between the firm's management team and participants in the financial markets. At stake is nothing less than the company's transparenc...

Hedge accounting is a technique for keeping the unrealized gains or losses out of net income until the hedge contract is realized (i.e. cash‐settled at maturity). It lets firms achieve the desired outcome of stabilizing cash flow by hedging without having to worry about any unpredictable swings in net income as a side‐effect. In hedge accounting, t...

According to a recent conjecture in the literature, earnings have become a poorer proxy for cash flow from operations over time. We find that since 1988, when cash flow statements started to be consistently reported in Compustat, the cash effectiveness of earnings has actually increased for a large sample of U.S. manufacturing firms. This occurs de...

Risk appetite has become a byword for bringing peoples' attention to the question of how much risk the organization is prepared to accept. While we agree that more attention on risk is often desirable, the current usage of the concept is highly inconsistent and may only serve to make firms more bureaucratic, over-governed, and reliant on simplistic...

This study examines the managerial power-hypothesis of selective hedging, which holds that selective hedging is observed more frequently in companies where managers have greater latitude to execute hedging proposals without serious scrutiny or questioning. The hypothesis is tested using hand-collected data on corporate governance and derivative pos...

Purpose The purpose of this paper is to develop a theory of enterprise risk management (ERM). Design/methodology/approach The method is to develop a theory for ERM based on identifying the general risk management problems that it is supposed to solve and to apply the principle of deduction based on these premises. Findings ERM consists of risk...

Combining two Swedish databases with unique strengths I show that stray firms, i.e. those lacking a controlling owner, have lower voluntary disclosure in financial reports (that is, information provided beyond what is formally required). This suggests managers prefer to withhold information to maximize their discretion over corporate policies. I al...

We use Swedish ownership data to explore whether a large and diversified shareholder base leads to lower volatility by improving the information content of stock prices. We find that volatility increases in the number of shareholders both with respect to the number of relatively large shareholders and the fraction of shares held by investors with s...

We test if managerial preferences explain how firms hedge using hand-collected data on derivative portfolios in the oil and gas industry. How firms hedge involves choosing between linear contracts and put options, and deciding whether to finance these hedging positions with cash-on-hand or by selling call options. The likelihood of being a hedger i...

This article provides a comprehensive critique of current corporate foreign exchange risk management (FXRM) practices. The authors characterize much of FXRM as a “legacy” activity, a set of outdated, often decentralized and “earnings‐driven” methods and procedures that have not been subjected to rigorous cost‐benefit analysis at the enterprise leve...

Using unique Swedish disclosure data from 2007 to 2012, this paper reports three important sets of findings with regard to the relationship between firms’ voluntary disclosure, external financing, and financial status. First, financially strong firms disclose more than weaker ones. Second, firms that obtain new financing (equity or debt) disclose m...

In the mid 2000s the oil and gas industry was hit by what might be best described as a ‘wall of cash’ as oil prices successively reached new record levels and access to external financing improved greatly. In this article we investigate what this sudden abundance of liquidity implied for the investment-cash flow relationship, the interpretation of...

Previous research has shown that firms identified as derivative users tend to be valued at a premium relative to non-users. In this paper I develop the hypothesis that the ‘derivative premium’ is higher in firms with centralised FX exposure management, compared to a decentralised approach in which subsidiaries retain bank contacts and/or decision-m...

A company’s overall risk profile is in no small measure determined by how much liquidity it has available to meet unforeseen cash outflows, and by how much debt leverage it has in its balance sheet, which may limit its access to new funding. In addition, the overall risk profile is clearly also a function of the risks identified in the “risk regist...

Distressed firms that are forced to liquidate assets in inefficient markets often have to accept prices that are substantially lower than the fair asset value. This asset illiquidity discount aggravates the financial situation of such firms and should be accounted for in risk management. This paper is the first to analyze financial hedging as a too...

This article presents the outline of a framework for evaluating liquidity risk (at the corporate level) with risk measures that are intuitive and economically relevant. In particular, the risk measures are designed explicitly to show the effectiveness of a company's risk management program in helping the firm to (1) avoid financial distress or defa...

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...

Enterprise Risk Management (ERM) is a holistic, integrated approach to managing a company's risks, in contrast to the so-called "silo-approach" prevalent in many firms in which risks are managed independently of each other. Yet for all the risk exposures that are brought under the corporate umbrella in an ERM-initiative, it may be inadequate for ad...

In this paper we derive an exposure-based measure of Cash-Flow-at-Risk (CFaR). Existing approaches to calculating CFaR either only focus on cash flow conditional on market changes or neglect market-risk exposures entirely. We argue here that an essential first step in a risk-management program is to quantify cash-flow exposure to macroeconomic and...