Corporate resiliency and the choice between financial and operational hedging *

64 Pages Posted: 26 Feb 2021 Last revised: 30 Apr 2024

See all articles by Viral V. Acharya

Viral V. Acharya

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Heitor Almeida

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

Yakov Amihud

New York University - Stern School of Business

Ping Liu

Krannert School of Management, Purdue University

Date Written: December 19, 2020

Abstract

We study how firms manage two potential defaults: Financial default on debt and operational default on delivery obligations.  Operational hedging being costly, financially constrained firms substitute between financial hedging (cash hoarding) and operational hedging (inventories and supply-chain diversification).  We predict that the firm’s markup rises in default risk, which induces cutting costs on operational hedging.  Empirically, operational hedging measured by inventory and supply-chain diversification lowers markup and raises cost of goods sold.  As predicted, markup increases and cost of goods sold decreases with the firm’s credit risk, especially when firms are financially constrained due to shocks in capital markets.  

Keywords: financial default, operational default, resilience, liquidity, risk management, inventory, supply chains JEL: G31, G32, G33

JEL Classification: G31, G32, G33

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Almeida, Heitor and Amihud, Yakov and Liu, Ping, Corporate resiliency and the choice between financial and operational hedging * (December 19, 2020). NYU Stern School of Business Forthcoming, Available at SSRN: https://ssrn.com/abstract=3792886 or http://dx.doi.org/10.2139/ssrn.3792886

Viral V. Acharya

New York University (NYU) - Leonard N. Stern School of Business ( email )

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HOME PAGE: http://www.stern.nyu.edu/~vacharya

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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Heitor Almeida (Contact Author)

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
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Yakov Amihud

New York University - Stern School of Business ( email )

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New York, NY 10012-1126
United States
212-998-0720 (Phone)
212-995-4233 (Fax)

Ping Liu

Krannert School of Management, Purdue University ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States
7654944691 (Phone)

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