Who hedges more when leverage is endogenous? A testable theory of corporate risk management under general distributional conditions

Who hedges more when leverage is endogenous? A testable theory of corporate risk management under... This paper develops a theory of a firm’s hedging decision with endogenous leverage. In contrast to previous models in the literature, our framework is based on less restrictive distributional assumptions and allows a closed-form analytical solution to the joint optimization problem. Using anecdotal evidence of greater benefits of risk management for firms selling “credence goods” or products that involve long-term relationships, we prove that those optimally leveraged firms, which face more convex indirect bankruptcy cost functions, will choose higher hedge ratios. Moreover, we suggest a new approach to test this relationship empirically. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Who hedges more when leverage is endogenous? A testable theory of corporate risk management under general distributional conditions

Loading next page...
Kluwer Academic Publishers-Plenum Publishers
Copyright © 2007 by Springer Science+Business Media, LLC
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
Publisher site
See Article on Publisher Site


  • A further empirical investigation of the bankruptcy cost question
    Altman, E. I.
  • On the existence of an optimal capital structure: Theory and evidence
    Bradley, M.; Jarrell, G. A.; Kim, E. H.
  • How firms should hedge
    Brown, G. W.; Toft, K. B.
  • Bankruptcy risk and optimal capital structure
    Castanias, R.
  • An analysis of the underreported magnitude of the total indirect costs of financial distress
    Chen, G. M.; Merville, L. J.
  • A note on forward price and forward measure
    Chen, R.; Huang, J.
  • Corporate hedging: The relevance of contract specifications and banking relationships
    Cooper, I. A.; Mello, A. S.
  • Structured debt and corporate risk management
    Culp, C. L.; Furbush, D.; Kavanagh, B. T.
  • Risk management: Coordinating corporate investment and financing policies
    Froot, K. A.; Scharfstein, D. S.; Stein, J. C.
  • Tax incentives to hedge
    Graham, J. R.; Smith, C. W.

You’re reading a free preview. Subscribe to read the entire article.

DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 12 million articles from more than
10,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Unlimited reading

Read as many articles as you need. Full articles with original layout, charts and figures. Read online, from anywhere.

Stay up to date

Keep up with your field with Personalized Recommendations and Follow Journals to get automatic updates.

Organize your research

It’s easy to organize your research with our built-in tools.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

Monthly Plan

  • Read unlimited articles
  • Personalized recommendations
  • No expiration
  • Print 20 pages per month
  • 20% off on PDF purchases
  • Organize your research
  • Get updates on your journals and topic searches


Start Free Trial

14-day Free Trial

Best Deal — 39% off

Annual Plan

  • All the features of the Professional Plan, but for 39% off!
  • Billed annually
  • No expiration
  • For the normal price of 10 articles elsewhere, you get one full year of unlimited access to articles.



billed annually
Start Free Trial

14-day Free Trial