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Dynamic Agency, financial hedging and optimal investment

Author

Listed:
  • Yang, Yehong
  • You, Xun
  • Sun, Yuqian

Abstract

Based on the continuous-time contract framework (DeMarzo et al., 2012), hereinafter referred to as the DFHW model), we develop an enhanced continuous-time contract framework incorporating an optimal financial hedging strategy to effectively mitigate firm-specific risks. This paper confirms the presence of a lagged effect of the hedging strategy on a firm’s investment. Compared with the DFHW model, our findings reveal that the optimal hedging strategy has a significant influence on dynamic contracts, including investors’ value, dynamic investment, dividend payments, and so on. Especially in an equilibrium state, the investors tend to distribute dividends at lower levels and earlier than those predicted by the DFHW model, thereby mitigating the risk burden on entrepreneurs. Finally, the hedging strategy is significantly influenced by hedging costs, which in turn have an impact on firms’ investment and dividend boundary. This paper further validates the rationality and feasibility of our devised financial hedging strategy.

Suggested Citation

  • Yang, Yehong & You, Xun & Sun, Yuqian, 2026. "Dynamic Agency, financial hedging and optimal investment," The North American Journal of Economics and Finance, Elsevier, vol. 81(C).
    • Handle: RePEc:eee:ecofin:v:81:y:2026:i:c:s1062940825001962
    DOI: 10.1016/j.najef.2025.102556
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    References listed on IDEAS

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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