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Neutral and Non Neutral Shock Effects on Hedging, Investment and Debt

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  • Marcello Spanò

Abstract

By trading derivatives on the financial markets, a firm can hedge against the fluctuations of its internal funds, in order to better coordinate investment and financing decisions. This work shows how optimal investment, debt and hedging strategy can be strongly dependent on the mechanism linking the firm's internal funds to its returns on investment. In particular, when internal funds react to a prospective price change (neutral shock), investment and debt would be positively related; when internal funds react to a non neutral productivity shock, investment and debt would be either negatively related (no hedging) or unrelated (hedging).

Suggested Citation

  • Marcello Spanò, "undated". "Neutral and Non Neutral Shock Effects on Hedging, Investment and Debt," Discussion Papers 01/08, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:01/08
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    File URL: https://www.york.ac.uk/media/economics/documents/discussionpapers/2001/0108.pdf
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    Keywords

    Hedging; investment; debt; volatility; productivity.;

    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

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