Financial Constraints, Competition, and Hedging in Industry Equilibrium

We analyze the hedging decisions of firms, within an equilibrium setting that allows us to examine how a firm's hedging choice depends on the hedging choices of its competitors. Within this equilibrium some firms hedge while others do not, even though all firms are ex ante identical. The fracti...

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Bibliographic Details
Published in:The Journal of finance (New York) 2007-10, Vol.62 (5), p.2445-2473
Main Authors: ADAM, TIM, DASGUPTA, SUDIPTO, TITMAN, SHERIDAN
Format: Article
Language:English
Subjects:
Capital costs
Cash flow
Competition
Corporate finance
Demand curves
Equilibrium
Financial investments
Financial management
Financial models
Financial research
Financial services industries
Hedging
Industrial market
Industrial production
Marginal cost curve
Predictions
Production costs
Risk management
Studies
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Summary:We analyze the hedging decisions of firms, within an equilibrium setting that allows us to examine how a firm's hedging choice depends on the hedging choices of its competitors. Within this equilibrium some firms hedge while others do not, even though all firms are ex ante identical. The fraction of firms that hedge depends on industry characteristics, such as the number of firms in the industry, the elasticity of demand, and the convexity of production costs. Consistent with prior empirical findings, the model predicts that there is more heterogeneity in the decision to hedge in the most competitive industries.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.2007.01280.x