How Do Croatian Companies Make Corporate Risk Management Decisions: Evidence From The Field

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Executive Summary

According to the Capital Asset Pricing Model and the Modigliani-Miller theorem, corporate risk management is irrelevant to the value of the firm. However, it is apparent that managers are constantly engaged in hedging activities that are directed at the reduction of corporate risks. As an explanation for this clash between theory and practice, imperfections in the capital market are used to argue for the relevance of corporate risk management function. This paper analyses corporate risk management practices and decision to hedge in large Croatian non-financial companies. It explores if decision to hedge corporate risks in the analyzed companies is a function of several firm's characteristics that have been proven as relevant in making risk management decisions.

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