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Forward Contracts and Firm Value: Investment Incentive and Contracting Effects

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Author Info
Bessembinder, Hendrik

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Abstract

Corporate risk hedging with forward contracts increases value by reducing incentives to underinvest. This occurs because the hedge decreases the sensitivity of senior claim value to incremental investment, allowing equity holders to capture a larger portion of the incremental benefit from new investment. Hedging also allows the firm to credibly commit to meet obligations in states where it otherwise could not, which improves contract terms the firm can negotiate with customers, creditors, and managers. These benefits cannot be duplicated by individual hedging, and each result holds independent of agents' risk preferences.

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Publisher Info
Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 26 (1991)
Issue (Month): 04 (December)
Pages: 519-532
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:cup:jfinqa:v:26:y:1991:i:04:p:519-532_00

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  1. M. Martin Boyer, 2004. "Is the Demand for Corporate Insurance a Habit? Evidence of Organizational Inertia from Directors' and Officers' Insurance," CIRANO Working Papers 2004s-33, CIRANO. [Downloadable!]
  2. Chao Hu & Pengguo Wang, 2005. "The Determinants of Foreign Currency Hedging–Evidence from Hong Kong Non-Financial Firms," Asia-Pacific Financial Markets, Springer, vol. 12(1), pages 91-107, March. [Downloadable!] (restricted)
  3. Azofra Palenzuela, Valentín & Díez Esteban, José María, 2001. "La cobertura corporativa del riesgo de cambio en las empresas no financieras españolas," Documentos de Trabajo "Nuevas Tendencias en Dirección de Empresas". Working Papers "New Trends on Business Administration". 2001-15, Interuniversitary Doctorate Program "New Trends on Business Administration", Universities of Valladolid, Burgos and Salamanca (Spain). Programa de Doctorado Interuniversitario "Nuevas Tendencias en Di. [Downloadable!]
  4. Rui Albuquerque, 2004. "Optimal Currency Hedging," Finance 0405010, EconWPA. [Downloadable!]
    Other versions:
  5. Sohnke M. Bartram & Gregory W. Brown & Frank R. Fehle, 2003. "International Evidence on Financial Derivatives Usage," Finance 0307003, EconWPA, revised 24 Jul 2003. [Downloadable!]
  6. M. Martin Boyer, 2003. "Directors' and Officers' Insurance and Shareholders' Protection," CIRANO Working Papers 2003s-64, CIRANO. [Downloadable!]
  7. Ammon, Norbert, 1998. "Why Hedge? - A Critical Review of Theory and Empirical Evidence -," ZEW Discussion Papers 98-18, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  8. Chen-Miao Lin & Stephen D. Smith, 2005. "Hedging, financing, and investment decisions: a simultaneous equations framework," Working Paper 2005-05, Federal Reserve Bank of Atlanta. [Downloadable!]
  9. Marcel Boyer & M. Martin Boyer & René Garcia, 2005. "The Value of Real and Financial Risk Management," CIRANO Working Papers 2005s-38, CIRANO. [Downloadable!]
  10. Lutz Hahnenstein & Klaus Röder, 2007. "Who hedges more when leverage is endogenous? A testable theory of corporate risk management under general distributional conditions," Review of Quantitative Finance and Accounting, Springer, vol. 28(4), pages 353-391, May. [Downloadable!] (restricted)
  11. Mine Ertugrul & Özcan Sezer & C. Sirmans, 2008. "Financial Leverage, CEO Compensation,and Corporate Hedging: Evidence from Real Estate Investment Trusts," The Journal of Real Estate Finance and Economics, Springer, vol. 36(1), pages 53-80, January. [Downloadable!] (restricted)
  12. Bartram, Söhnke M., 2007. "Corporate Cash Flow and Stock Price Exposures to Foreign Exchange Rate Risk," MPRA Paper 6662, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  13. Bartram, Sohnke & Bodnar, Gordon, 2005. "The Exchange Rate Exposure Puzzle," MPRA Paper 6482, University Library of Munich, Germany. [Downloadable!]
  14. Sun, Junjie, 2005. "U.S. Financial Transmission Rights: Theory and Practice," Staff General Research Papers 12266, Iowa State University, Department of Economics. [Downloadable!]
  15. Bartram, Söhnke M., 2004. "The Use of Options in Corporate Risk Management," MPRA Paper 6663, University Library of Munich, Germany. [Downloadable!]
  16. Kapitsinas, Spyridon, 2008. "The Impact of Derivatives Usage on Firm Value: Evidence from Greece," MPRA Paper 10947, University Library of Munich, Germany. [Downloadable!]
  17. Amrit Judge, 2004. "The Determinants of Foreign Currency Hedging by UK Non-Financial Firms," Money Macro and Finance (MMF) Research Group Conference 2004 60, Money Macro and Finance Research Group. [Downloadable!]
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