Month: August 2018

How to Evaluate Risk Management Units in Financial Institutions?

How to Evaluate Risk Management Units in Financial Institutions?

Continuing in our series of articles from the JACF Winter issue our authors discuss the existing Enterprise Risk Management framework and current government regulations, “banks are required to establish risk management units (RMUs) to review and evaluate their risks, monitor them, and to advise top management.” Currently an integral part of the risk governance and management process, RMUs in financial institutions have become increasingly important since the 2007-2008 financial crisis.

This article details the authors’ creation of an index to evaluate the performance of risk management units in financial institutions, and then examines some of their findings. The index transforms twelve parameters into a simple and convenient index that isolates the RMU’s activities from the rest of the organizational risk management process, its risk preferences and the activities of the rest of the units. The index’s parameters are divided into three dimensions of the RMU’s performance: professionalism, organizational status and relationship with top management and the board.

The authors found a positive relationship between their RMUI and some important risk governance characteristics: CROs who are among the five highest paid executives at the bank, banks with at least one independent director serving on the board’s risk committee having banking and finance experience and boards with greater efficacy.

Authored by Michael Gelman, Ben-Gurion University of the Negev, Doron Greenberg, Ariel University, and Mosi Rosenboim, Ben-Gurion University of the Negev

Biomarker of Quality? Venture-Backed Biotech IPOs and Insider Participation

Biomarker of Quality? Venture-Backed Biotech IPOs and Insider Participation

Corporate financial managers of biotech firms need long-term financing to reach key milestones, and that requires a long-term capital structure.

In Hans Jeppsson’s article on venture capitalists and IPOs from our JACF Winter issue the author discusses how corporate financial managers of biotech firms must balance a mix of investors with different objectives and different investment horizons that includes traditional venture capitalists and also hedge funds and mutual funds. This study helps practitioners understand the complex role of exit decisions, as venture capitalists seek better exit strategies and performance. IPOs are financing but not “exit” moves.

In addition to certifying firm value, insider purchasing of shares in the IPO offering has two major consequences. First, venture capitalists reallocate large sums of capital from early-stage to late-stage deals that are expected to have lower risk (but also lower expected return) and shorter time to exit. Second, the speed at which VCs exit after the IPO depends on the firm ownership structure after the IPO and the stock liquidity. Going public with a significant participation by venture capitalists will probably increase the post-IPO ownership and decrease the free float of the stock, implying a delay of the exit and the realization of the capital gains from the investments.

Although this study has focused exclusively on the biotechnology industry, insider participation is not unique to it. Biotech’s venture brethren in the software and technology industries also have insider participation in IPOs. During 2003-2015, approximately 41 venture-backed firms outside of the biotechnology sector had insider participation.

Authored by Hans Jeppsson, University of Gothenburg