ABSTRACT
Risk management avoids loss in shareholder value from damage to property and other assets, business interruption and liabilities to third parties. A different intuition on the benefits of risk management comes by adopting the conventional assumption in finance that a firm's value is equal to its expected future cash flows discounted at an appropriate risk-adjusted rate. The discount rate reflects total risk to the firm's cash flows, which is the sum of market risk and diversifiable risk. Given that firm value changes with either expected cash flows or the discount rate, and risk can alter both parameters, firm risk has multiple impacts on shareholder value. The link between corporate returns and risk arises in the cost and uncertainties that are associated with strategic risks. However, risk management does not change the expected values of the asset's future income, nor does it reduce the inherent uncertainty associated with an asset's cash flows.
