Investment, Debt and Risk Management in a Context of Uncertain Returns to Investment
AbstractIn 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economics, University of York in its series Discussion Papers with number 01/07.
Date of creation:
Date of revision:
Contact details of provider:
Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
Phone: (0)1904 323776
Fax: (0)1904 323759
Web page: http://www.york.ac.uk/economics/
More information through EDIRC
Hedging; investment; debt; volatility; internal funds.;
Find related papers by 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-10-09 (All new papers)
- NEP-CFN-2001-10-09 (Corporate Finance)
- NEP-FIN-2001-10-09 (Finance)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paul Hodgson).
If references are entirely missing, you can add them using this form.