Reducing Information Asymmetries:
Many a times, there exists information asymmetry between the insiders and the external investors. Insiders have a greater knowledge about the firm’s position. Therefore, the outsiders always want the firm to reduce risk from activities that are outside management control. This helps in building up their confidence and lowers their return expectations. This again in turn reduces the cost of capital to the firm and increases firm value. This benefit of financial risk management associated with reducing information asymmetries can be concludes as below:
- FRM can help firms to lower the risk from activities that are outside management control and boost investor confidence
- FRM can reduce cost of capital and increase firm value