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Financial distress and corporate risk management: Theory and evidence

  • Purnanandam, Amiyatosh

This paper extends the current theoretical models of corporate risk-management in the presence of financial distress costs and tests the model's predictions using a comprehensive data set. I show that the shareholders optimally engage in ex-post (i.e., after the debt issuance) risk-management activities even without a pre-commitment to do so. The model predicts a positive (negative) relation between leverage and hedging for moderately (highly) leveraged firms. Consistent with the theory, empirically I find a non-monotonic relation between leverage and hedging. Further, the effect of leverage on hedging is higher for firms in highly concentrated industries.

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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 87 (2008)
Issue (Month): 3 (March)
Pages: 706-739

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Handle: RePEc:eee:jfinec:v:87:y:2008:i:3:p:706-739
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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