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Efficiency or resiliency? Corporate choice between financial and operational hedging

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  • Acharya, Viral
  • Almeida, Heitor
  • Amihud, Yakov
  • Liu, Ping

Abstract

We propose that firms face two potential defaults: Financial default on their debt obli- gations and operational default such as a failure to deliver on obligations to customers. Hence, financially constrained firms substitute between saving cash for financial hedg- ing to mitigate financial default risk, and spending on operational hedging, which mitigates operational default risk. Whereas corporate financial hedging increases in leverage, operational hedging declines in leverage. This results in a positive relation- ship between operational spread (markup) and financial leverage or credit risk, which is stronger for financially constrained firms.We present empirical evidence supporting this relationship.

Suggested Citation

  • Acharya, Viral & Almeida, Heitor & Amihud, Yakov & Liu, Ping, 2021. "Efficiency or resiliency? Corporate choice between financial and operational hedging," CEPR Discussion Papers 15885, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15885
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    Cited by:

    1. Barry, John W. & Campello, Murillo & Graham, John R. & Ma, Yueran, 2022. "Corporate flexibility in a time of crisis," Journal of Financial Economics, Elsevier, vol. 144(3), pages 780-806.

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    More about this item

    Keywords

    Financial default; Operational default; Resilience; Liquidity; Financial constraints; Risk management;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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