Abstract

http://ssrn.com/abstract=934589
 


 



Who Hedges More When Leverage is Endogenous? A Testable Theory of Corporate Risk Management Under General Distributional Conditions


Lutz Hahnenstein


WGZ Bank AG

Klaus Röder


University of Regensburg - Faculty of Business, Economics & Information Systems

September 11, 2006

Review of Quantitative Finance and Accounting, Vol. 28, pp. 353-392, 2007

Abstract:     
This paper develops a theory of a firm's hedging decision with endogenous leverage. In contrast to previous models in the literature, our framework is based on less restrictive distributional assumptions and allows a closed-form analytical solution to the joint optimization problem. Using anecdotal evidence of greater benefits of risk management for firms selling "credence goods" or products that involve long-term relationships, we prove that those optimally leveraged firms, which face more convex indirect bankruptcy cost functions, will choose higher hedge ratios. Moreover, we suggest a new approach to test this relationship empirically.

Keywords: corporate hedging, risk management, leverage, capital structure, bankruptcy, financial distress

JEL Classification: G32, G39

Accepted Paper Series


Not Available For Download

Date posted: October 5, 2006 ; Last revised: July 19, 2011

Suggested Citation

Hahnenstein, Lutz and Röder, Klaus, Who Hedges More When Leverage is Endogenous? A Testable Theory of Corporate Risk Management Under General Distributional Conditions (September 11, 2006). Review of Quantitative Finance and Accounting, Vol. 28, pp. 353-392, 2007. Available at SSRN: http://ssrn.com/abstract=934589

Contact Information

Lutz Hahnenstein (Contact Author)
WGZ Bank AG ( email )
Düsseldorf
Germany
49-211-778-2346 (Phone)
Klaus Röder
University of Regensburg - Faculty of Business, Economics & Information Systems ( email )
Universitstrasse 31
Regensberg D-93053
Germany
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