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Investment, Debt and Risk Management in a Context of Uncertain Returns to Investment

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  • Marcello Spanò

Abstract

In a context of uncertain returns to investment, a firm may face increasing costs of borrowing and uncertain value of its internal finance. Froot, Scharfstein, and Stein (1993) develop a framework where the firm can hedge against the fluctuations of its cash flow, in order to better coordinate investment and financing decisions. This work moves within this framework and finds an approximated analytical solution that allows one to better understand the properties of the optimal hedging strategy, as well as the effects of hedging on firm's investing and financing behaviour. Numerical simulations of the non closed-form optimal solution are also obtained to validate the approximation, which is thus supported by numerical evidence.

Suggested Citation

  • Marcello Spanò, "undated". "Investment, Debt and Risk Management in a Context of Uncertain Returns to Investment," Discussion Papers 01/07, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:01/07
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    File URL: https://www.york.ac.uk/media/economics/documents/discussionpapers/2001/0107.pdf
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    References listed on IDEAS

    as
    1. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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    More about this item

    Keywords

    Hedging; investment; debt; volatility; internal funds.;
    All these keywords.

    JEL classification:

    • G19 - Financial Economics - - General Financial Markets - - - Other
    • 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

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