Operating Risk and the Rights of Lenders to Control It

Operating risk is a major concern for firm management and stakeholders. Stark examples of losses due to corporate operations include BP’s $17.2 billion loss in June 2010 following the Deepwater Horizon incident (Wong and Yousuf, 2010) and Freeport-McMoRan’s $13.9 billion loss in 2008 due to plunging metal prices and difficulty with the acquisition of a rival company (James, 2009). The consequences of these and other operating losses are significant, and spill over to connected firms (Wu, 2016). Managers may be willing to make risky operating decisions if they are unaware of the risk or measure it poorly, or if their … Read more