Hedging and Coordinated Risk Management: Evidence from Thrift Conversions

Authors

  • Catherine Schrand,

    1. University of Pennsylvania
    Search for more papers by this author
    • Schrand is from the University of Pennsylvania and Unal is from the University of Maryland and the Wharton Financial Institutions Center. The authors thank seminar participants at the University of Georgia, the University of Maryland, Ohio State University, the Wharton School, the 1995 Financial Management Association Meetings, and the 1997 American Finance Association Annual Meetings. The detailed comments of Paul Fischer, Mark Flannery, Bruce Grundy, Dilip Madan, Bernadette Minton, Gordon Phillips, Joseph Sinkey, Cliff Smith, René Stulz (the editor), and an anonymous referee were especially useful. We are grateful to the Office of Thrift Supervision for providing data.

  • Haluk Unal

    1. University of Maryland and the Wharton Financial Institutions Center
    Search for more papers by this author
    • Schrand is from the University of Pennsylvania and Unal is from the University of Maryland and the Wharton Financial Institutions Center. The authors thank seminar participants at the University of Georgia, the University of Maryland, Ohio State University, the Wharton School, the 1995 Financial Management Association Meetings, and the 1997 American Finance Association Annual Meetings. The detailed comments of Paul Fischer, Mark Flannery, Bruce Grundy, Dilip Madan, Bernadette Minton, Gordon Phillips, Joseph Sinkey, Cliff Smith, René Stulz (the editor), and an anonymous referee were especially useful. We are grateful to the Office of Thrift Supervision for providing data.


ABSTRACT

We provide an explanation for hedging as a means of allocating rather than reducing risk. We argue that when increases in total risk are costly, firms optimally allocate risk by reducing (increasing) exposure to risks that provide zero (positive) economic rents. Our evidence shows that mutual thrifts that convert to stock institutions increase total risk following conversion, consistent with their increased abilities and incentives for risk taking. They achieve this increase by hedging interest-rate risk and increasing credit risk. We provide some evidence that risk-management activities are related to growth capacity and management compensation structure attained at conversion.

Ancillary