Who Cares About Transient Shocks? Evidence from Workforce Investments in Risk Management

Lauren Mostrom, Finance PhD student

The existing literature on risk management focuses overwhelmingly financial hedging, which overlooks firms’ operational investments aimed at reducing the volatility of underlying shocks. This dissertation develops a novel measure of firms’ inputs into operational risk management (ORM): the fraction of the wage bill allocated to supply chain risk and quality assurance roles. I establish that ORM investment is substantial—6% of the total wage bill on average—and strongly predicts both reduced profit volatility and higher market valuations. Using a novel IV approach based on SEC administrative delays, I show that ORM investment nearly doubles following a successful IPO. Evidence from covenant violations and credit downgrades suggests this shift is not driven by the relaxation of financial constraints. Instead, preliminary results indicate that this transition represents a shift in the firm’s investments in reducing volatility, either through a change in managerial talent or incentives created by the change in ownership.