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On risk management determinants: what really matters?

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  • Georges Dionne
  • Thouraya Triki

Abstract

We develop a theoretical model in which debt and hedging decisions are made simultaneously, and test its predictions empirically. To address inefficiencies in current estimation methods for simultaneous equations with censored dependent variables, we build an original estimation technique based on the minimum distance estimator. Consistent with predictions drawn from our theoretical model, we show that more hedging does not always lead to a higher debt capacity. We also find that financial distress costs, information asymmetry, the presence of financial slack, corporate governance, and managerial risk aversion are important determinants of corporate hedging. Overall, our evidence shows that modeling hedging and leverage as simultaneous decisions makes a difference in analyzing corporate hedging determinants.

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File URL: http://hdl.handle.net/10.1080/1351847X.2012.664156
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

Volume (Year): 19 (2013)
Issue (Month): 2 (February)
Pages: 145-164

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Handle: RePEc:taf:eurjfi:v:19:y:2013:i:2:p:145-164

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References

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Citations

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Cited by:
  1. Mohamed Mnasri & Georges Dionne & Jean-Pierre Gueyie, 2013. "The Maturity Structure of Corporate Hedging: the Case of the U.S. Oil and Gas Industry," Cahiers de recherche 1337, CIRPEE.
  2. Kevin Aretz & Söhnke M. Bartram, 2010. "Corporate Hedging And Shareholder Value," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 33(4), pages 317-371, December.
  3. Wissem Bouaziz & Abdelfettah Bouri, 2012. "Ownership structure and financial institutes risk taking: evidence from Tunisian quoted bank (financial institute)," International Journal of Managerial and Financial Accounting, Inderscience Enterprises Ltd, vol. 4(1), pages 47-60.
  4. J. Cummins & Georges Dionne & Robert Gagné & A. Nouira, 2009. "Efficiency of insurance firms with endogenous risk management and financial intermediation activities," Journal of Productivity Analysis, Springer, vol. 32(2), pages 145-159, October.
  5. Selim Mankaï & Aymen Belgacem, 2013. "Interactions Between Risk-Taking, Capital, and Reinsurance for Property-Liability Insurance Firms," EconomiX Working Papers 2013-23, University of Paris West - Nanterre la Défense, EconomiX.
  6. Georges Dionne & Marc Santugini, 2012. "Entry, Imperfect Competition, and Futures Market for the Input," Cahiers de recherche 1215, CIRPEE.
  7. Monda, Barbara & Giorgino, Marco & Modolin, Ileana, 2013. "Rationales for Corporate Risk Management - A Critical Literature Review," MPRA Paper 45420, University Library of Munich, Germany.
  8. Georges Dionne & Thouraya Triki, 2005. "Risk Management and Corporate Governance: the Importance of Independence and Financial Knowledge for the Board and the Audit Committee," Cahiers de recherche 0515, CIRPEE.

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