Corporate Resiliency and the Choice Between Financial and Operational Hedging

Viral Acharya, Heitor Almeida, Yakov Amihud and Ping Liu

No 33340, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We investigate how firms manage financial default risk (on debt) and operational default risk (on delivery obligations). Financially constrained firms reduce operational hedging through inventory and supply chain in favor of cash holdings. Our model predicts that firms’ markup increases with financial default risk as they cut operational hedging costs. Empirical analysis confirms this prediction and shows that the markup-credit risk relationship strengthens during adverse aggregate shocks, particularly for firms exposed to lending disruptions. Market power alone cannot explain this relationship, which reflects firms’ strategic adjustments in operational hedging practices.

JEL-codes: G31 G32 G33 (search for similar items in EconPapers)
Date: 2025-01
New Economics Papers: this item is included in nep-cfn and nep-rmg
Note: CF
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