Faculty of Economics and Business Administration Publications Database

Impediments to Communication in Financial Institutions: Implications for the Risk Management Organization

Höring, Dirk
Schlütter, Sebastian
Volume: 41
Number: 2
Pages: 193 - 224
Month: September
Link External Source: Online Version
Year: 2016
Keywords: Risk management; Organization structure; Financial institutions

This article investigates the question of how risk management should be embedded in a financial firm’s hierarchy. We answer this question by combining capital market theory with game-theoretic thinking. We develop a theory for the integration of risk management into an organization, based on private information and differences in preferences. Our model compares the payoffs from uninformed decision-making, solo decision-making, joint voting decision-making, and coordinated decision-making when information about a project’s expected return and risk is dispersed in the organization. Our findings have a number of implications for the organization of risk management.