Corporate resiliency and the choice between financial and operational hedging *
64 Pages Posted: 26 Feb 2021 Last revised: 30 Apr 2024
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: Suggested Citation