CREDIT RISK

Credit risk

Credit Risk

ABSTRACT

The credit crisis of 2005-2007 could be considered the worst economic turmoil

the United States has seen since the Great Depression of the 1930s. As the full effects

of the credit crisis are still unfolding, demand for research differentiating among financial

firms handling of the crisis is strong. This dissertation studies performance by focusing

on firm characteristics of financial firms. The paper is based on the credit risk mangement. It is logical to assume that a firm's risk choices and their ability to manage risk explain the differentials in performance during the credit crisis. All the results are evaluated from the SPSS

Chapter I

It is logical to assume that a firm's risk choices and their ability to manage risk

explain the differentials in performance during the credit crisis. However, risk is an

unobservable firm choice that affects performance. This research assumes that the

credit crisis was an exogenous negative shock to the financial system. This shock will

reveal a firm's risk position and management through its performance; firms with riskier

positions or with poorer risk management will perform worse. The first essay explores stock incentives owned by CEOs and directors of financial firms and how that helps to explain firm performance. Theory suggests that stock incentives will have a motivational impact on management as to the amount of effort they will put forth and as to how attractive risk is.

This research uses the credit crisis as a natural experiment to reveal a firm's chosen risk position. The results of the study find that performance during the credit crisis depends on the type of stock incentives. Specifically the results show evidence that options lead to lower performance during the credit crisis and stock ownership leads to higher performance. The results also show that options are positively related to firm risk measures and stock ownership is negatively related to firm risk. The second essay explores firm structure and the related management accounting system and how they explain differences in firm performance. Theory suggests that these two firm characteristics are related to risk management. The credit crisis provides a shock to environment and the performance during the crisis reveals a firm's ability to manage risk. The results suggest that firms with more flexible structures and a fit between management accounting systems and their structure perform better during the credit crisis

The credit crisis rocked the financial markets in the late 2000s. It appeared that

banks were either unable to manage their risk exposure or were unaware of it until

assets started to turn sour. Firm risk has two main components. The first concerns the

assets that a firm chooses to invest in. The second is the uncertainty of the

environment that a firm operates in. The first risk is endogenous and the second is

exogenous to the firm. A good management accounting system (MAS) will track both

risks. It will provide managers with information about how to hedge or balance the risk

of their asset portfolio and track the environment to provide managers with timely

information about changes in ...