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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page The Implications of Risk Management Information Systems for the Organization of Financial Firms
Michael S. Gibson
1998-632  (December 1998)

Abstract:  Financial dealer firms have invested heavily in recent years to develop information systems for risk measurement. I take it as given that technological progress is likely to continue at a rapid pace, making it less expensive for financial firms to assemble risk information. I look beyond questions of risk measurement methodology to investigate the implications of risk management information systems. By examining several theoretical models of the firm in the presence of asymmetric information, I explore how a financial firmís capital budgeting, incentive compensation, capital structure, and risk management activities are likely to change as it becomes less costly to assemble risk information. I also explore the likely effects of the falling cost of assembling risk information on a financial firmís organizational structure. Two common themes emerge: centralization within the firm and increased disclosure of risk information outside the firm are both likely to increase.

Full paper (27 KB PDF)

Keywords
Asymmetric information, value at risk, capital budgeting, incentive compensation, capital structure, organizational structure.

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