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Who hedges more when leverage is endogenous? A testable theory of corporate risk management under general distributional conditions

  • Lutz Hahnenstein

    ()

  • Klaus Röder
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    This paper develops a theory of a firm’s hedging decision with endogenous leverage. In contrast to previous models in the literature, our framework is based on less restrictive distributional assumptions and allows a closed-form analytical solution to the joint optimization problem. Using anecdotal evidence of greater benefits of risk management for firms selling “credence goods” or products that involve long-term relationships, we prove that those optimally leveraged firms, which face more convex indirect bankruptcy cost functions, will choose higher hedge ratios. Moreover, we suggest a new approach to test this relationship empirically. Copyright Springer Science+Business Media, LLC 2007

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    File URL: http://hdl.handle.net/10.1007/s11156-007-0017-z
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    Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

    Volume (Year): 28 (2007)
    Issue (Month): 4 (May)
    Pages: 353-391

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    Handle: RePEc:kap:rqfnac:v:28:y:2007:i:4:p:353-391
    Contact details of provider: Web page: http://springerlink.metapress.com/link.asp?id=102990

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