Hedging, Financing, and Investment Decisions: A Theory and Empirical Tests

Posted: 3 Jun 2003

Date Written: February 2003

Abstract

In this paper we theoretically and empirically examine the interaction between hedging, financing, and investment decisions. A simple equilibrium model with costly financial distress suggests that as firms become more efficient at risky investments vis a vis riskless investments, they will borrow less, invest more in risky assets, and hedge more. The model also predicts a positive relationship between hedging and leverage, which is consistent with debt capacity arguments. Using Probit, OLS and simultaneous equations, we find that the empirical findings are for the most part consistent with the model predictions.

Keywords: Risk management, Investment, Financing

JEL Classification: D84, G31, G32

Suggested Citation

Smith, Stephen Dewitt and Lin, Chen-Miao, Hedging, Financing, and Investment Decisions: A Theory and Empirical Tests (February 2003). Available at SSRN: https://ssrn.com/abstract=409280 or http://dx.doi.org/10.2139/ssrn.409280

Chen-Miao Lin (Contact Author)

Clayton State University ( email )

Morrow, GA 30260
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
2,153
PlumX Metrics