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asked ago in General Economics Questions by (2.3k points)
Under the CAPM and other theories, a widely held corporation should be averse only to systematic risk, correlated with other investments in the economy, not idiosyncratic risk like a CEO dying or a fire which are special to the firm and which shareholders could diversify away.  Yet there do exist a number of reasons why firms might be averse to idiosyncratic risk. I'm working on  a paper on one of them,and I wonder whether we economists ever think about it.  I think it would come up in non-economists' minds, but I  pretty quickly  but I haven't seen it mentioned by economists.

So I am curious as to what reasons you readers think of for firms to be risk averse. Why would a firm require a higher return from a project, a policy, or a contract with more risk uncorrelated with other risks?   I won't list even the four or so  standard ones, because I am curious as to what might be mentioned.

1 Answer

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answered ago by (140 points)
My first instinct is that it's largely a matter of management putting its own interests (e.g. future employment) ahead of the stockholders'.