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?

• 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)