Corporate Risk Management Under Information Asymmetry

50 Pages Posted: 26 Apr 2014 Last revised: 31 Dec 2016

See all articles by Jongmoo Jay Choi

Jongmoo Jay Choi

Temple University; National Bureau of Economic Research (NBER); Temple University - International Business

Connie X. Mao

Temple University - Fox School of Business and Management; Temple University - Department of Finance

Arun Upadhyay

Florida International University

Date Written: April 11, 2014

Abstract

This paper examines the financial and operational hedging activities of U.S. pharmaceutical and biotech firms that are subject to high level of information asymmetry stemming from R&D investments during 2001-2006. We find evidence in support of the information asymmetry hypothesis à la Froot, Scharfstein and Stein (1993) that hedging helps mitigate the under-investment problem. Specifically, we find that the use of financial derivatives is associated with greater firm value and that the value enhancement is larger for firms subject to greater information asymmetry and better growth opportunities. There is a synergy between financial hedging and operational hedging where the latter is used to counter product development risk. The results are robust with respect to alternative performance measures, industry-specific growth measures, and the endogeneity problem. Our work is differentiated from existing studies that examined commodity-based industries without addressing information asymmetry.

Keywords: corporate risk management, R&D, financial hedging, operational hedging, information asymmetry, pharmaceutical or biotech firms

JEL Classification: G32, D82

Suggested Citation

Choi, Jongmoo Jay and Mao, Connie X. and Upadhyay, Arun, Corporate Risk Management Under Information Asymmetry (April 11, 2014). Fox School of Business Research Paper No. 14-032. Available at SSRN: https://ssrn.com/abstract=2423859 or http://dx.doi.org/10.2139/ssrn.2423859

Jongmoo Jay Choi

Temple University ( email )

Fox School of Business
Temple University
Philadelphia, PA 19122
United States
215-204-5084 (Phone)
215-204-1697 (Fax)

HOME PAGE: http://astro.temple.edu/~jjchoi

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Temple University - International Business ( email )

Philadelphia, PA 19122
United States

Connie X. Mao (Contact Author)

Temple University - Fox School of Business and Management ( email )

416 Alter Hall
Philadelphia, PA 19122
United States
215-204-4895 (Phone)
215-204-1697 (Fax)

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-4895 (Phone)
215-204-1697 (Fax)

Arun Upadhyay

Florida International University ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

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