Hedging the Value of Waiting

Glenn Boyle and Graeme Guthrie

No 18974, Working Paper Series from Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation

Abstract: We analyze the optimal hedging policy of a firm that has flexibility in the timing of investment. Conventional wisdom suggests that hedging adds value by alleviating the underinvestment problem associated with capital market frictions. However our model shows that hedging also adds value by allowing investment to be delayed in circumstances where the same frictions would cause it to commence prematurely. Thus hedging can have the paradoxical effect of reducing investment. We also show that greater timing flexibility increases the optimal quantity of hedging but has a non-monotonic effect on the additional value created by hedging. These results may help explain the empirical findings that investment rates do not differ between hedgers and non-hedgers and that hedging propensities do not depend on standard measures of growth opportunities.

Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://ir.wgtn.ac.nz/handle/123456789/18974

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:vuw:vuwcsr:18974

Access Statistics for this paper

More papers in Working Paper Series from Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation ISCR, PO Box 600, Victoria University Wellington 6140, New Zealand. Contact information at EDIRC.
Bibliographic data for series maintained by Library Technology Services ().