Risk Management: Coordinating Corporate Investment and Financing Policies

33 Pages Posted: 29 Jan 2001 Last revised: 31 Aug 2022

See all articles by Kenneth Froot

Kenneth Froot

Harvard University Graduate School of Business; National Bureau of Economic Research (NBER)

David S. Scharfstein

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: May 1992

Abstract

This paper develops a general framework for analyzing corporate risk management policies. We begin by observing that if external sources of finance are more costly to corporations than internally generated funds, there will typically be a benefit to hedging: hedging adds value to the extent that it helps ensure that a corporation has sufficient internal funds available to take advantage of attractive investment opportunities. We then argue that this simple observation has wide-ranging implications for the design of risk management strategies. We delineate how these strategies should depend on such factors as shocks to investment and financing opportunities. We also discuss exchange-rate hedging strategies for multinationals. as well as strategies involving "nonlinear" instruments like options.

Suggested Citation

Froot, Kenneth and Scharfstein, David S. and Stein, Jeremy C., Risk Management: Coordinating Corporate Investment and Financing Policies (May 1992). NBER Working Paper No. w4084, Available at SSRN: https://ssrn.com/abstract=226886

Kenneth Froot (Contact Author)

Harvard University Graduate School of Business ( email )

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David S. Scharfstein

Harvard Business School - Finance Unit ( email )

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HOME PAGE: http://www.people.hbs.edu/dscharfstein/

National Bureau of Economic Research (NBER)

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Jeremy C. Stein

Harvard University - Department of Economics ( email )

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HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html

National Bureau of Economic Research (NBER)

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