Corporate Risk Management in Small Norwegian Firms

Owners of small firms have, in general, tied most of their wealth to one firm. Hence, in terms of motives for risk management, owners and managers could have more in common in small and medium sized firms than in large public companies. Still, there has b een little research on the use of risk management by closely held firms. Using a panel data set with property insurance contracts (and other lines of insurance) from AON Grieg, Norway, with more than 3000 firm-year observations from 2003 until 2006, this project aims at demonstrating that unlike in large firms with diversified owners, managers and the undiversified owners of small firms and family firms play a much more active role in shaping corporate risk management. The first novelty of our approach is to rely on small firm data. This is important, since these firms are in general closely held and also highly sensitive to shocks that can be avoided by buying insurance. Consequently, one would expect to find a stronger foundation for any hedging motive with small firm data than elsewhere. The second novelty is the use of detailed ownership data. This will enable us to group investors into individual (personal) large-block owners, managers, and institutional owners. We expect that this will improve the s tatistical tests and higher inclination to manage risk than what has been shown in the past using large, listed companies. This is because in public firms with diffuse ownership only managers (or a few very large-block owners) may be motivated to hedge be cause of risk aversion. Not surprisingly, therefore, the evidence on managerial motives for risk management is rather weak. The third novelty is to analyze risk management in small firms jointly with the capital structure decision (interest rate risk mana gement). We expect that a closely-held firm variable, along with percentage ownerships of the CEO and the largest owner, will help establish the importance of ownership structure for risk management.