Financial Constraints, Competition and Hedging in Industry Equilibrium

63 Pages Posted: 25 May 2004

See all articles by Tim Adam

Tim Adam

Humboldt University

Sudipto Dasgupta

Chinese University of Hong Kong, Lancaster University, and CEPR

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: May 2006

Abstract

We analyze the hedging decisions of firms, which take into account both the costs and the benefits of risk, in an equilibrium context. The equilibrium setting allows us to examine how a firm's hedging choice depends on the hedging choices of its competitors. We show that in equilibrium some firms hedge, while others do not, even though all firms are ex ante identical. The model further shows how the fraction of firms that hedge depends on industry characteristics, such as on the number of firms in the industry, the elasticity of demand, the convexity of production costs, and the relative market shares of each firm. Consistent with prior empirical findings the model predicts that we should observe more heterogeneity in the decision to hedge in the most competitive industries.

Keywords: Financial constraints, hedging, speculating, equilibrium, competition

JEL Classification: G32, G39, D21, D43

Suggested Citation

Adam, Tim and Dasgupta, Sudipto and Titman, Sheridan, Financial Constraints, Competition and Hedging in Industry Equilibrium (May 2006). AFA 2005 Philadelphia Meetings. Available at SSRN: https://ssrn.com/abstract=550021 or http://dx.doi.org/10.2139/ssrn.550021

Tim Adam

Humboldt University ( email )

Dorotheentr. 1
Berlin, Berlin 10099
Germany
+49 (0)30 2093-5641 (Phone)
+49 (0)30 2093-5643 (Fax)

Sudipto Dasgupta (Contact Author)

Chinese University of Hong Kong, Lancaster University, and CEPR ( email )

CUHK, Cheng Yu Tung Building, Room 1224
Shatin, NT
Hong Kong
Hong Kong

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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