Do Firms Hedge During Distress?

51 Pages Posted: 10 Jun 2019

See all articles by Heitor Almeida

Heitor Almeida

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Kristine Watson Hankins

University of Kentucky

Ryan Williams

University of Arizona - Department of Finance

Date Written: May 20, 2019

Abstract

Firms are less likely to use derivatives as they approach distress, even though theory predicts risk management is more valuable then. By expanding the definition of hedging to include purchase obligations (POs) – non-cancelable forward contracts with suppliers – we are able to understand how firms hedge and whether hedging matters. Firms rely on POs during distress, often switching from derivatives to these contracts. Firms also initiate POs in response to liquidity shocks. Moreover, compared to derivatives, PO hedging enables higher investment levels during distress. Firms adjust – but do not cease – hedging when constrained and this mitigates underinvestment.

Suggested Citation

Almeida, Heitor and Hankins, Kristine Watson and Williams, Ryan, Do Firms Hedge During Distress? (May 20, 2019). Available at SSRN: https://ssrn.com/abstract=3393020 or http://dx.doi.org/10.2139/ssrn.3393020

Heitor Almeida

University of Illinois at Urbana-Champaign ( email )

515 East Gregory Drive
4037 BIF
Champaign, IL 61820
United States
217-3332704 (Phone)

HOME PAGE: http://www.business.illinois.edu/FacultyProfile/faculty_profile.aspx?ID=11357

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kristine Watson Hankins

University of Kentucky ( email )

College of Business & Economics
Lexington, KY 40506-0034
United States

Ryan Williams (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

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