Risk, the Limits of Financial Risk Management, and Corporate Resilience

Existing evidence shows convincingly that expected cash flows of nonfinancial firms can be negatively affected by their total risk, so that nonfinancial firms can create shareholder wealth by managing their total risk. After reviewing theories that demonstrate links between firm value and total risk, I examine how financial risk management is used to manage firm total risk. I conclude from the evidence that the use of financial risk management is mostly limited to near-term risk in nonfinancial firms. I offer explanations for this limited role of financial risk management. I argue that the limitations of financial risk management make it important for firms to also focus on resilience and call for more research on the costs and benefits of resilience.