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Risk management and optimal capital structure under ambiguity

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  • Kim, Hwa-Sung

Abstract

This study examines how managers’ perceived ambiguity influences risk management policies and capital structure decisions. After deriving the optimal hedge ratio and leverage ratio under ambiguity, we show the relationship between our results and recent studies. Our result supports the empirical evidence of a negative relationship between ambiguity and leverage ratio. We also find that the efficiency of hedging is an important factor when examining the value of hedging under ambiguity. The literature shows that the value of hedging increases with ambiguity; however, this result holds only when the efficiency of hedging is large, as in a full-hedge strategy.

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  • Kim, Hwa-Sung, 2021. "Risk management and optimal capital structure under ambiguity," Finance Research Letters, Elsevier, vol. 40(C).
    • Handle: RePEc:eee:finlet:v:40:y:2021:i:c:s1544612320311685
    DOI: 10.1016/j.frl.2020.101752
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    Cited by:

    1. Kim, Hwa-Sung, 2024. "Effects of incomplete information on risk management," Finance Research Letters, Elsevier, vol. 64(C).
    2. ZHANG, Dongyang, 2021. "Corporate innovativeness and risk management of small firms – evidences from start-ups," Finance Research Letters, Elsevier, vol. 42(C).
    3. Shust, Efrat, 2024. "The ambiguous December," Finance Research Letters, Elsevier, vol. 61(C).
    4. Hwa-Sung Kim, 2023. "Effects of ambiguity on innovation strategies," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-27, December.

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    More about this item

    Keywords

    Ambiguity; Risk management; Minimum variance hedge ratio; Efficiency of hedging; Optimal capital structure;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • 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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