Hostname: page-component-77c89778f8-vsgnj Total loading time: 0 Render date: 2024-07-16T21:00:18.346Z Has data issue: false hasContentIssue false
  • English
  • Français

Forward Contracts and Firm Value: Investment Incentive and Contracting Effects

Published online by Cambridge University Press:  06 April 2009

Hendrik Bessembinder
Get access Rights & Permissions [Opens in a new window]

Abstract

Corporate risk hedging with forward contracts increases value by reducing incentives to underinvest. This occurs because the hedge decreases the sensitivity of senior claim value to incremental investment, allowing equity holders to capture a larger portion of the incremental benefit from new investment. Hedging also allows the firm to credibly commit to meet obligations in states where it otherwise could not, which improves contract terms the firm can negotiate with customers, creditors, and managers. These benefits cannot be duplicated by individual hedging, and each result holds independent of agents' risk preferences.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 26 , Issue 4 , December 1991 , pp. 519 - 532
Copyright
Copyright © School of Business Administration, University of Washington 1991

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Adler, M., and De Temple, J.. “On the Optimal Hedge of a Non Traded Cash Position.” Journal of Finance, 43 (03 1988), 143–153.CrossRefGoogle Scholar
Anderson, R. W., and Danthine, J.. “Cross Hedging.” Journal of Political Economy, 89 (12 1981), 1182–1196.CrossRefGoogle Scholar
Baron, D. P. “Flexible Exchange Rates, Forward Markets, and the Level of Trade.” American Economic Review, 66 (06 1976), 253–266.Google Scholar
Booth, J. “Monitoring Inside Debt: An Analysis of Bank Loan Covenants.“ Working Paper, Arizona State Univ. (1990).Google Scholar
Diamond, D. “Reputation Acquisition in Debt Markets. Journal of Political Economy, 97 (08 1989), 828–862.CrossRefGoogle Scholar
Gurel, E., and Pyle, D.. “Bank Income Taxes and Interest Rate Risk Management: A Note.” Journal of Finance, 34 (09 1984), 1199–1206.CrossRefGoogle Scholar
Ho, T. S. Y. “Intertemporal Commodity Futures Hedging and the Production Decision.” Journal of Finance, 39 (06 1984), 351–376.CrossRefGoogle Scholar
Holthausen, D. M. “Hedging and the Competitive Firm under Price Uncertainty.” American Economic Review, 69 (12 1979), 989–995.Google Scholar
MacMinn, R. “Forward Markets, Stock Markets, and the Theory of the Firm.” Journal of Finance, 42 (12 1987), 1167–1185.CrossRefGoogle Scholar
Mayers, D., and Smith, C. W.. “Corporate Insurance and the Underinvestment Problem.” Journal of Risk and Insurance (03 1987), 45–54.CrossRefGoogle Scholar
Modigliani, F., and Miller, M.. “The Cost of Capital, Corporation Finance, and the Theory of Investment.” American Economic Review, 48 (06 1958), 261–297.Google Scholar
Myers, S. C. “Determinants of Corporate Borrowing.” Journal of Financial Economics, 5 (11 1977), 147–175.Google Scholar
Shapiro, A. C., and Titman, S.. “An Integrated Approach to Corporate Risk Management.” Midland Corporate Finance Journal, 3 (Fall 1985), 41–55.Google Scholar
Smith, C. W., and Stulz, R. M.. “The Determinants of Firms' Hedging Policies.” Journal of Financial and Quantitative Analysis, 20 (12 1985), 391–405.CrossRefGoogle Scholar
Smith, C. W., and Warner, J. B.. “On Financial Contracting: An Analysis of Bond Covenants.” Journal of Financial Economics, 7 (06 1979), 117–161.CrossRefGoogle Scholar
Stulz, R. M. “Optimal Hedging Policies.” Journal of Financial and Quantitative Analysis, 19 (06 1984), 127–140.CrossRefGoogle Scholar