- Costs of financial distress
- Variability of investment needs such as R&D expense
- Taxes: progressive or convex tax functions, or diminished value of tax loss carryforwards
- Transactions costs: can the firm hedge at a lower cost than an individual
- Asymmetric information flows between managers, owners, and debtholders
- Poorly diversified managers (if value added by retaining managers > cost of hedging and there is no other contractual way to reduce managers' risk)
Nov 10, 2008
Legitimate reasons to hedge
The best criterion for determining if risks should be hedged: does the hedge increase firm value? From an HBS paper - what are some of the imperfections that make risk management relevant?
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