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Abstract
In my dissertation, I examine corporate risk management behavior of U.S. insurers. In my first essay, I investigate the effects of executive compensation on corporate risk management. Because risk averse managers may underinvest and reduce risk beyond what is optimal for investors, I examine whether firms can encourage managerial risk taking through compensation that leads managers to hedge less. Our unique dataset allows us to build the comprehensive and clean measure of corporate hedging behavior. Utilizing the implementation of FAS 123R, paper finds that CEO compensation has a causal effect on their firms overall hedging. In addition, paper provides strong evidence that CEO compensation has a causal effect on firms insurance demand but only weak evidence on derivative usage. In my second essay, I investigate whether Enterprise Risk Management (ERM) creates value by allowing firms to take more strategic business risk and greater advantage of opportunities in their core business. Firms that engage in ERM should be able to better understand the aggregate risk inherent in different business activities. With an increased understanding in a firms risk profile, ERM adopting firms should take a more strategic approach to risk management and expand risk-taking in areas where they do have a comparative advantage. We find that ERM adopting firms are increasing its share of core risk. We also find that life insurers have significantly higher share of core risk. ERM firms are increasing its share of core risk not through the risk substitution with non-core risk but by increasing its non-core risk. This provides evidence that ERM firms are recognizing interactions among sources of risks and the benefits of natural hedges.