According to classical finance theory, a risk neutral firm has no incentives to hedge. We will investigate why firms hedge by starting from the assumptions underlying the Modigliani-Miller propositions. One at a time, we will relax the assumptions and investigate the effect on hedging incentives…
Contents
1. Introduction
Purpose
Limitations
Different types of risk reduction
How and how much to hedge
What to hedge
Hedging versus speculation
Outline
2. Background
Definitions
Theory
Identifying hedgers
Measuring corporate hedging
3. Introduction to Analysis
4. Costs of financial distress
Theory
Empirical evidence
Summary
5. Taxes – Convexity of the tax function Theory
Empirical evidence
Summary
6. Taxes – Increase Leverage
Theory
Empirical evidence
Summary
7. Asymmetric information and Agency Problems
Costly external financing
Theory
Empirical evidence
Summary
Managerial behavior
Ill-diversified managers
Differential time horizons….
…..
Author: Emanuel Viklund, Jacob Zachrison
Source: Stockholm School of Economics
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