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)
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Last update: July 19, 2001