Identification and Treatment of Risk: Recent Empirical Evidence from Selected Topics Kumulative Dissertation der Wirtschaftswissenschaftlichen Fakultät der Universität Augsburg zur Erlangung des Grades eines Doktors der Wirtschaftswissenschaften (Dr. rer. pol.) vorgelegt von Matthias Walter (Diplom-Kaufmann Univ., Bachelor of Science) Augsburg, November 2015 Erstgutachter: Prof. Dr. Hans Ulrich Buhl Zweitgutachter: Prof. Dr. Yarema Okhrin Vorsitzender der mündlichen Prüfung: Prof. Dr. Axel Tuma Tag der mündlichen Prüfung: 08. Dezember 2015 „There is nothing more risky than not taking any risks." Josep “Pep” Guardiola Table of Contents ii Table of Contents Index of Research Papers ........................................................................................................ iv I Introduction ........................................................................................................................ 1 I.1 Objectives and Structure of this Doctoral Thesis ................................................... 9 I.2 Research Context and Research Questions ........................................................... 11 I.3 References ............................................................................................................. 17 II Risk Identification – Aggregated Empirical Evidence ................................................. 22 II.1 Research Paper 1: “What do we really know about corporate hedging? A multimethod meta-analytical study” ..................................................................... 23 II.2 Research Paper 2: “How do soccer matches and competitions really influence stock markets? A review of recent empirical evidence” ....................................... 91 III Risk Treatment – Recent Empirical Evidence from the Financial and Industrial Sector ............................................................................................................................... 138 III.1 Research Paper 3: “Market pricing of Credit Linked Notes - the influence of the financial crisis” ............................................................................................. 139 III.2 Research Paper 4: “Is the convenience yield a good indicator of a commodity’s supply risk?” ................................................................................. 173 IV Summary and Future Research .................................................................................... 174 IV.1 Summary ............................................................................................................. 174 IV.2 Future Research .................................................................................................. 178 IV.3 References ........................................................................................................... 185 Please note: References are provided at the end of each section or research paper, respectively. Index of Research Papers iii Index of Research Papers This doctoral thesis contains the following four research papers, of which two are already published or accepted for publication, and two are under review for publication: Research Paper 1 (RP 1): Geyer-Klingeberg J, Hang M, Rathgeber A, Stöckl S, Walter M (2015). What do we really know about corporate hedging? A multimethod meta-analytical study. Working paper. Research Paper 2 (RP 2): Walter M (2015). How do soccer matches and competitions really influence stock markets? A review of recent empirical evidence. Working paper. Research Paper 3 (RP 3): Walter M, Häckel B, Rathgeber A (2015). Market pricing of Credit Linked Notes - the influence of the financial crisis. Journal of Credit Risk 12(1):43-74. VHB-JOURQUAL 3: category B Impact Factor 2014: 0.310 Research Paper 4 (RP 4): Stepanek C, Walter M, Rathgeber A (2013). Is the convenience yield a good indicator of a commodity’s supply risk? In Resources Policy 38(3):395-405, doi: 10.1016/j.resourpol.2013.06.001 Impact Factor 2014: 2.053 I Introduction 1 I Introduction What is the scope of this thesis? In past decades, risk management has been implemented in a majority of companies across all sectors. The main reason for this is that risk management directly contributes to shareholder value (Gay and Nam 1998; Bartram 2000; Beasley 2005), and thus, supports the basic idea of value-based management, which can be attributed to Rappaport (1986). In addition, risk management is driven by a number of regulatory requirements. For instance, in the United States, the New York Stock Exchange requires the audit committee of each listed company to “discuss policies with respect to risk assessment and risk management” (Ittner and Keusch 2015). In Germany, the “Gesetz zur Kontrolle und Transparenz im Unternehmensbereich (KonTraG)” requires every listed company to implement an early risk warning system and to include a statement regarding its risk structure within their financial statements. In addition, companies within the financial sector are obligated to fulfill the requirements of the “Mindestanforderungen an das Risikomanagement (MaRisk)”. Thereby, MaRisk also requires the implementation of a risk management process. Such a risk management process is also proposed by various contributors in economic research (Bandyopadhyay et al. 1999; Stoneburner et al. 2002; Huther 2003; Wolf 2003; Hallikas et al. 2004; Merna and Al-Thani 2010; Beech and Chadwick 2013; and PMI 2013). Other than small differences in denominations and delimitation, there is a broad consensus (e.g., Bandyopadhyay et al. 1999; Harland et al. 2003; Hallikas et al. 2004) that the risk management process is a continuous loop rather than a linear process, and that it can be subdivided into four separate phases, similar to the basic idea of the strategic management process: (1) risk identification, (2) risk assessment, (3) risk treatment, and (4) risk monitoring. Each of the process phases is essential for a holistic risk management within a company and thus for an increase in corporate value. Nevertheless, the phases of “risk identification” and “risk treatment” are of particular interest, as – at least for German companies – these two phases contain the biggest potential for risk management optimization (BDI 2011). This empirical finding is strengthened by Wolf (2003), who characterizes the risk identification phase as the basis of the risk management process, thus determining its efficiency. This is in line with Wolz (2001), who shows that in practice, risk identification is one of the major challenges for firms with respect to risk management. In addition, Hallikas et al. (2004) describe risk identification as a “fundamental phase in the risk management practice”. The relevance of risk treatment is emphasized by Aebi et al. I Introduction 2 (2012), who denote the improvement of the treatment of risks as the main focus in quantitative risk management. Consequently, this doctoral thesis focuses on the identification and treatment of risks and provides empirical evidence regarding both phases. Figure I-1 displays the aforementioned risk management process as a cycle, and the content- related focus of the doctoral thesis at hand: Focus of this doctoral thesis (chapter II) Risk Risk Monitoring Identification Risk Risk Treatment Assessment Focus of this doctoral thesis (chapter III) Figure I-1: Risk management process and focus of the doctoral thesis Risk is a very broad field of research, and risk in economics in particular. This starts with the definition of risk and does not end with the classification of various types of risk. Therefore, the aim of this thesis is not to provide a comprehensive and detailed overview of risk management, but rather to address selected topics from distinct areas within risk management.1 However, in order to achieve a common understanding for this thesis, some basic definitions are provided briefly hereafter. What is “risk”? This thesis follows the generally accepted definition of risk as an uncertain positive or negative outcome (e.g., return, credit repayments, or availability of a commodity) by simultaneously available subjective or objective probabilities for this outcome (Huther 2003; Hull 2010). This is in line with the definition of risk in classical decision theory, which conceives risk as “reflecting variation in the distribution of possible outcomes, their 1 For a detailed overview of risk management, please refer to the respective standard literature on risk management; e.g., Wolf (2003), Gleißner and Romeike (2005), Albrecht and Maurer (2008), Gleißner (2008), Wolke (2008), Hull (2010), Merna and Al-Thani (2010), and Rejda and McNamara (2014). I Introduction 3 likelihoods, and their subjective values” (March and Shapira 1987). In this context, risk can be measured by (1) nonlinearities in the revealed utility for money or (2) by the variance of the probability distribution of possible profits and losses related to a particular alternative (Pratt 1964; Arrow 1965).2 How can different types of risk be classified? Risk can be classified in different categories. Regarding the classification of risks, this thesis follows the widely accepted classification scheme of, e.g., Albrecht and Maurer (2008) or Hull (2010), who subdivide risk as: (1) credit risk, (2) market risk, (3) liquidity risk, and (4) operational risk. Thereby, credit risk includes all risks associated with a potential default of a borrower, bond issuer, or counterparty in a derivative transaction (Hull 2010). In other words, credit risk is the risk that one of the aforementioned