Stakeholder Firm-Specific Investments: Financial Hedging and Corporate Diversification

Posted: 8 Dec 2001

See all articles by Sonya S. Lim

Sonya S. Lim

DePaul University - Department of Finance

Heli C. Wang

Hong Kong University of Science & Technology (HKUST) - Department of Management & Organization

Date Written: November 2001

Abstract

We examine financial hedging and corporate diversification as two major risk management mechanisms. It is often believed that financial hedging and corporate diversification are substitutive means of risk management, implying that with the rapid development of the financial hedging market, there will be less need for a firm to manage risks through costly diversification. Building upon a stakeholder-based reason for firm risk management, we show that financial hedging and corporate diversification are more often complementary than substitutive. Using financial hedging instruments can increase the benefit obtained from diversification since financial hedging and corporate diversification are effective for different types of risks.

Keywords: Financial Hedging, Corporate Diversification, Stakeholder firm-specific investments

Suggested Citation

Lim, Sonya S. and Wang, Heli, Stakeholder Firm-Specific Investments: Financial Hedging and Corporate Diversification (November 2001). Available at SSRN: https://ssrn.com/abstract=292611 or http://dx.doi.org/10.2139/ssrn.292611

Sonya S. Lim

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States

HOME PAGE: http://sites.google.com/site/sonyalim/

Heli Wang (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Management & Organization ( email )

Clear Water Bay, Kowloon
Hong Kong

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