Efficiency or resiliency? Corporate choice between financial and operational hedging

Viral Acharya, Heitor Almeida, Yakov Amihud and Ping Liu

No 15885, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We propose that firms face two potential defaults: Financial default on their debt obli- gations and operational default such as a failure to deliver on obligations to customers. Hence, financially constrained firms substitute between saving cash for financial hedg- ing to mitigate financial default risk, and spending on operational hedging, which mitigates operational default risk. Whereas corporate financial hedging increases in leverage, operational hedging declines in leverage. This results in a positive relation- ship between operational spread (markup) and financial leverage or credit risk, which is stronger for financially constrained firms.We present empirical evidence supporting this relationship.

Keywords: Financial default; Operational default; Resilience; Liquidity; Financial constraints; Risk management (search for similar items in EconPapers)
JEL-codes: G31 G32 G33 (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-cfn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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