This paper illustrates the profound difference between a risk management strategy of variance minimization and a risk management strategy of lower tail outcome elimination. Risk managers concerned about the variability of cash flows will tend to center their hedge decisions on their best guess on future cash flows (the budget), while risk managers concerned about costly lower tail outcomes will hedge (considerably) less depending on the level of uncertainty. A risk management strategy of lower tail outcome elimination is in line with theoretical recommendations in a corporate value-adding perspective. A cross-case study of blue-chip industrial companies partly supports the empirical use of a risk management strategy of lower tail outcome elimination but does not exclude other factors from (co-)driving the observations.
International Business and Economy Conference 2002, 2002