RISK FINANCING FOR CAPITAL INVESTMENTS TO ENHANCE SHAREHOLDERS’ VALUE

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Abstract

The purpose of any company should be the maximization of shareholders’ wealth, which implies a higher return on equity and less risk associated with the capital invested. Capital investment opportunities however impact on both the return on equity and the associated company-specific risks. These two factors need to be played of against each other, because higher return on equity usually requires higher associated risks. Given the risks associated with capital investments, equity capital or risk financing instruments can be used to provide the protection needed. Until recently the main focus was on the traditional approach, making use of equity capital instead of risk financing instruments. This research puts the emphasis on the improvement of financial decision-making by companies, through the use of risk financing instruments instead of equity capital, freeing the equity for other strategic investments.

Keywords: Captive Insurance, Contingency Fund, Equity Programme, Futures Contracts, Insurance

How to cite this paper: Stander, C., Mostert, J. H. & Mostert, F. J. (2009). Risk financing for capital investments to enhance shareholders’ value. Corporate Ownership & Control, 7(1-3), 385-393. https://doi.org/10.22495/cocv7i1c3p5