Liquidity management and corporate demand for hedging and insurance

Jean Rochet and Stephane Villeneuve

Journal of Financial Intermediation, 2011, vol. 20, issue 3, 303-323

Abstract: We analyze the demand for hedging and insurance by a firm facing cash-flow risks. We study how the firm's liquidity management policy interacts with two types of risk: a Brownian risk that can be hedged through a financial derivative, and a Poisson risk that can be insured by an insurance contract. We find that the patterns of insurance and hedging decisions are pole apart: cash-poor firms should hedge but not insure, whereas the opposite is true for cash-rich firms. We also find non-monotonic effects of profitability. This may explain the mixed findings of empirical studies on corporate demand for hedging and insurance.

Keywords: Liquidity; management; Risk; management; Corporate; hedging (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:20:y:2011:i:3:p:303-323

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