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Financial Policies and Hedging

George Allayannis

University of Virginia - Darden School of Business

Michael J. Schill

University of Virginia ­ Darden School of Business

December 2, 2010

While firms commonly benchmark corporate financial policies against industry peers, empirically, some firms consistently deviate to pursue “rogue” policies with either a conservative or an aggressive bias. Using a panel of large U.S. firms between 1975 and 2008, we study the incidence, joint frequency distribution, and valuation effect of conservative and aggressive financial policies across four policy dimensions: leverage, payout, liquidity, and risk management. Consistent with a hedging effect, we find that conservative (aggressive) financial policies are generally associated with higher (lower) valuations. In addition, consistent with hedging theories, we find that firms with high growth opportunities which also face financial constraints benefit more from conservative financial policies. We also observe a time-variation in the valuation effects. For example, we find that conservative liquidity policies are associated with lower valuation benefits during periods of high economic growth while most aggressive policies are associated with even lower valuations as the average level of the policy increases. Finally, our tests of joint rogue policies provide evidence consistent with agency explanations. For example, firms which pursue both conservative leverage and conservative liquidity policies are valued at a discount, even though those that pursue a conservative leverage or a conservative liquidity policy on its own are valued at a premium.

Number of Pages in PDF File: 57

Keywords: Risk Management, Financial Policies, Hedging

JEL Classification: G32

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Date posted: January 11, 2011  

Suggested Citation

Allayannis, George and Schill, Michael J., Financial Policies and Hedging (December 2, 2010). Available at SSRN: http://ssrn.com/abstract=1719182 or http://dx.doi.org/10.2139/ssrn.1719182

Contact Information

George Allayannis (Contact Author)
University of Virginia - Darden School of Business ( email )
Box 6550
Charlottesville, VA 22906-6550
United States
434-924-3434 (Phone)
HOME PAGE: http://faculty.darden.edu/allayannisy
Michael J. Schill
University of Virginia ­ Darden School of Business ( email )
P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4071 (Phone)
434-243-7676 (Fax)
HOME PAGE: http://www.darden.virginia.edu/faculty/schill.htm
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