Dynamic Risk Management: Investment, Capital Structure, and Hedging in the Presence of Financial Frictions
Abstract
This paper develops a dynamic risk management model to determine a firm's optimal risk management strategy. This strategy has two elements: First, for low leverage values, the firm fully hedges its operating cash flow exposure, due to the convexity of its cost of capital. When leverage exceeds a very high threshold, the firm gambles for resurrection and stops hedging Second, the firm manages its capital structure through dividend distributions...
Paper Details
Title
Dynamic Risk Management: Investment, Capital Structure, and Hedging in the Presence of Financial Frictions
Published Date
Feb 10, 2013
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