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This paper aims to extend the understanding of how real options reasoning (ROR) is associated with downside risk and how a firm’s portfolio (explore and exploit) of investment activities affects managers’ ability to effectively apply ROR in relation to downside risk.

The survey method is used. It is applied to a population of Danish firms, which in 2018 had more than 100 employees. The chief financial officer was the target respondent.

This study finds that a higher level of ROR is associated with lower levels of downside risk. ROR’s association with lower levels of the downside risk is also moderated by the level of relative exploration orientation in a negative direction.

The field of ROR research on downside risk and portfolio subadditivity has been dominated by research focused on multinationality. This paper extends extant literature on ROR by studying ROR as a multidimensional construct of firm action, which is associated with lower levels of downside risk, also when studied outside of a multinationality setting. This is the case when ROR is implemented as a complete system. This paper also applies a framework of exploitation and exploration to show that findings on subadditivity in options portfolios caused by asset correlations extend outside the scope of multinationality and into one of product/service innovation.

Today, long-term success requires firms to sense changes in their environments early and react efficiently to them. Increasing middle managers’ participation in decision-making about market-related and product-related questions has been suggested as one way of enhancing this strategic responsiveness; abandoning formal planning, such as annual budgets, has been another. Yet, empirical evidence on the matter is scarce and conflicting. Drawing on data from Denmark’s 500 largest firms, we show that participation of middle managers in decision-making about new products and markets to serve, in-deed, increases firms’ strategic responsiveness as assessed by a reduction in firms’ downside risk. However, this effect is not a direct one. Nor does it interact positively or negatively with the emphasis put on formal planning as submitted in literature. Our evidence suggests that emphasis on planning mediates the relation between stronger participation of middle managers in decision-making and the increase in firms’ strategic responsiveness. This has implications for ongoing theory building and practice.

The purpose of this paper is to explore how multinationality affects multinational companies’ (MNCs) downside risk and the moderate effects of ownership structure in the setting of emerging markets based on Chinese publicly traded manufacturing MNCs.

The author derives hypotheses based on real options theory and agency theory, and tests hypotheses by using Tobit model and a unique data set of Chinese A-shared publicly traded manufacturing MNCs in the period of 2010–2016.

The empirical results suggest that multinationality is positively related to downside risk and this effect is subjected to ownership structure for firms in emerging markets. In particular, multinationality of MNCs with a high level of ownership concentration, managerial ownership and institutional ownership is more likely to reduce downside risk.

The main conclusion of this paper highlights the importance of ownership structure of MNCs in explaining the real options value of multinationality, and conveys to owners of MNCs in China and other emerging markets the need to strengthen firms’ governance if they want to maximize the benefits of multinational operations.

This study extends existing studies by taking ownership structure into consideration and highlighting the importance of agency problem in the examination of multinationality and downside risk, which provides a potential explanation for previous mixed evidence. This study also provides new evidence for the relationship between multinationality and downside risk by using a unique sample from China, an emerging market country.

Multinational structure has been linked to operational flexibilities that can improve corporate adaptability and a knowledge‐based view suggests that multinational resource diversity can facilitate responsive opportunities. The enhanced maneuverability from this can reduce earnings volatility and hence the corporate performance risk. But, the internationalization process may also require irreversible investments that increase corporate exposures and leave the risk implications of multinational enterprize somewhat ambiguous. Hence, the purpose of the paper is to present an empirical study of the implied relationships between the degree of multinationality and various risk measures including downside risk, upside potential, and performance risk.

The paper provides a brief literature review, develops hypotheses, and tests them in two‐stage least square regressions on archival data to control for pre‐selection biases.

The analyses indicate that multinationality is associated with lower downside risk as well as higher upside potential and leads to reduced performance risk. The study finds no trace of diminishing effects from higher degrees of multinationality.

The empirical study uses a sample of large US‐based corporations, which could affect the generalizability of results. However, this is consistent with other studies and eases comparability of findings.

The findings add to the ongoing debate about the risk effects of a multinational corporate structure and confirms that a diverse multinational presence is associated with positive risk outcomes.

The paper complements a limited number of studies with equivocal results and adopts alternative risk outcome measures. The study extends the industry scope by introducing a comprehensive sample of firms operating in different manufacturing and service businesses.

This chapter reassesses the economics of interest rate risk management in light of the global financial crisis by developing a derivative-based integrated treatment of interest rate and credit risk interrelation. The decade-long historical data on credit default swap spreads and interest rate swap rates are used as proxy measures for credit risk and interest rate risk, respectively. An elasticity of interest rate risk and credit risk, considered a function of the business cycle phases, maturity of instruments, economic sector, creditworthiness, and other macroeconomic parameters, is investigated for optimizing economic capital. This chapter sheds light on how financial institutions may address hedge strategies against downside risks implementing the proposed derivative-based integrated treatment of interest rate and credit risk assessment allowing for optimization of interest rate swap contracts. The developed framework of integrated interest rate and credit risk management is of special importance for emerging markets heavily dependent on foreign capital as it potentially allows emerging market banks to improve risk management practices in terms of capital adequacy and Basel III rules. Analyzing diversification versus compounding effects, it allows enhancing financial stability through jointly optimizing Pillar 1 and Pillar 2 economic capital.

The world in which companies operate today is volatile, uncertain, complex, and ambiguous, thus subjecting contemporary forms to an array of risks that challenge their viability in an increasingly competitive landscape. Organizations that cling to their traditional ways of operating impede their ability to survive while those able to embrace evolving changes and lever their strategic response capabilities (SRCs) will thrive against the odds. The possession of such capabilities has become a prominent explanation for effective adaptation to the impending changes but is rarely analyzed and tested empirically. Strategic adaptation typically assumes innovation as an important component, but we know little about how the innovative processes interact with the firm’s SRCs. Hence, this study investigates these implied relationships to discern their effects on organizational performance and risk outcomes. It explores the effects of SRCs and the role of innovation as intertwined adaptive mechanisms supporting strategic renewal that can attain superior performance and risk effects. The relationships are analyzed based on a large sample of US manufacturing firms over the decade 2010–2019. The study reveals that firms possessing effective SRCs have the ability to exploit opportunities and deflect risky situations to gain favorable performance and risk outcomes. While innovation indeed plays a role, the precise nature and dynamic effect thereof remain inconclusive.

The purpose of this paper is to argue that strategic responsiveness is of paramount importance for effective risk management outcomes and to introduce an empirical study to demonstrate this.

Real options logic is adopted to explain how effective risk management capabilities improve performance and how innovation and financial slack enhance this effect. The propositions are examined across 896 companies using two‐stage least square regressions.

The study reveals that risk management effectiveness combines both the ability to exploit opportunities and avoid adverse economic impacts, and has a significant positive relationship to performance. This effect is moderated favorably by investment in innovation and lower financial leverage.

The analysis is based on a sample of large firms, which may affect the generalizability of results. Nonetheless, the study shows that effective risk management capabilities differentiate the firms and determine success and failure. It further underscores the importance of combined innovation policy and capital structure decisions as firms deal effectively with risk and uncertainty.

The findings indicate that corporate management must consider commitments for innovation and financial slack to enhance positive risk management effects. This result is in dire contrast to traditional beliefs that tighter resource management and higher financial leverage lead to better economies.

This is one of few studies to explicitly consider strategic responsiveness as instrumental for effective risk management outcomes while investigating the economic effects associated with the ability to combine generation of upside gains and downside loss avoidance.

This paper categorizes and critiques the empirical research strategies that have been employed to test real options theory. Existing research has sought to detect valuable options in firms’ strategic investments as well as to investigate the payoffs from these investments. Our review highlights some of the evidence that has accumulated in recent years for real options theory. We flag some of the most important challenges and tradeoffs associated with the use of different empirical research approaches for testing real options theory in strategic management. The paper concludes by offering a number of research priorities to advance the theory by probing its descriptive validity as well as by addressing its normative aspirations to bridge corporate finance and strategy.

Viewing the domestic downside risk as a “pushing” factor for outward foreign direct investment (OFDI), this study aims to examine the surge in Chinese cross-border acquisitions (CBAs) between 2008 and 2017, a unique window when private firms in China were allowed to conduct CBAs.

This study examines the effect of down-side risk on cross-border acquisition performance by using the sample of Chinese A-share listed companies from 2008 to 2017. Specifically, this study considers three kinds of systemic risk, systematic risk and idiosyncratic risk, and respectively examines their impact on CBAs activities; this study also investigates their subsequent results after CBAs activities. The contingency effect of state ownership on the above relationship is also discussed.

The findings reveal that pre-CBA systemic risk explains the volume of CBA activities; CBAs are followed by a reduction in systemic risk; the interactions between systemic risk and CBAs decrease with the level of state ownership; and the above results do not hold for traditional risk measures (i.e. systematic risk and idiosyncratic risk).

This study contributes to the literature by revealing the role of systemic risk as a “pushing” factor in the context of OFDI and suggesting an alternative explanation for CBAs from China: Chinese firms (especially private firms) took advantage of the rare opportunity between 2008 and 2017 given by the government to transfer assets overseas through CBA.

This paper provides a stakeholder-based rationale for firm risk reduction through diversification. While firm-specific investments from stakeholders are often important sources of firm competitive advantage and economic rents, there is a reduced incentive for stakeholders to make these investments due to the risk associated with firm-specific investments. Since the risk associated with firm-specific investments is often related to the total firm risk level, we argue that stakeholders’ difficulties in diversifying the risks associated with their firm-specific investments create incentives for risk management by firms. We test this argument in a diversification setting. Based on a sample of firms’ first acquisition moves, we find that firms are more likely to engage in risk reduction through diversification when high levels of firm-specific assets are important to the firm's operations. Several proxies for stakeholders’ specific investments are found to be significant in explaining cross-sectional variation in the extent of ex ante risk reduction in acquisitions.