Corporate Risk Management and Information Disclosure

In this paper, we propose a theory linking corporate risk management, information disclosure and cost of capital. We show that the hedging strategy of a value-maximizing firm can be an instrument of its disclosure policy. We emphasize that optimal hedging strategy does not systematically eliminate all risks but distinguishes between undesired risks that have to be hedged because they are a source of noise, and risks that should not be eliminated because they have an informational content. We show that optimal risk management, by eliminating noise, reduces the variability of the firm’s cost of capital, thereby creating value. Moreover, having shown that optimal hedging policy depends on whether hedge transactions are disclosed or not, we then discuss the optimality of disclosure requirements in hedge accounting standards.