Endogenous Corporate Risk Tolerance: Financial Capacity, Planning and Entropic Valuation

Abstract

This working monograph develops a framework in which a firm's effective risk tolerance is not a primitive preference parameter but an endogenous output of its financial architecture. Building on the entropic (exponential) valuation functional, it formalises how instruments of resilience — capital, credit lines, hedging, insurance, liquidity — generate financial capacity, how capacity and governance jointly determine an effective tolerance, and how that tolerance feeds back into corporate decisions. The construction connects convex risk measures, the Esscher transform, and Entropic Value-at-Risk to corporate financial planning, and extends to risk sharing among participants with endogenous, costly tolerances, for which a proportional sharing rule with equalisation of marginal capacity costs is derived. The treatment separates established results from conjectural proposals throughout, and states testable comparative implications.