ERM concepts and Risk categorisation [19]

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Bullet points include: Academics like to refer to the Modigliani-Miller theorem Business ‘value’ not supposed to change when type of asset base changed (equity versus debt) Hence, if true, risk management (in form of corporate hedging) should have no effect on firm value But market ‘frictions’ can create potential value added and should apply to all companies E.g. Froot and Stein (1999) – increasing costs of raising equity funding (associated with agency and incomplete information problems) mean that negative shocks prevent companies from taking advantage of profitable investment opportunities

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