This paper investigates operational hedging by firms and how operational hedging is related to financial hedging by using a sample of 424 firm observations, which consist of 212 operationally hedged firms (firms with foreign sales) and a size- and industry-matched sample of 212 non-operationally hedged firms (firms with export sales). We find that non-operationally hedged firms use more financial hedging, relative to their levels of foreign currency exposure, as measured by the amount of export sales. On the other hand, though operationally hedged firms have more currency exposure, their usage of financial derivatives becomes much smaller than that of exporting firms. These results can explain why some global firms use very limited amount of financial derivatives for hedging purpose despite much higher levels of currency risk exposure. We also show that hedging increases firm value.

Unlike previous studies, this paper finds a consistent and highly significant relationship between beta and cross-sectional portfolio returns. The key distinction between our tests and previous tests is the recognition that the positive relationship between returns and beta predicted by the Sharpe-Lintner-Black model is based on expected rather than realized returns. In periods where excess market returns are negative, an inverse relationship between beta and portfolio returns should exist. When we adjust for the expectations concerning negative market excess returns, we find a consistent and significant relationship between beta and returns for the entire sample, for subsample periods, and for data divided by months in a year. Separately, we find support for a positive payment for beta risk.

This paper studies pension fund design in the context of investment in the debt and equity of a firm. We employ a general equilibrium framework to demonstrate that: (i) the asset location ‘puzzle’ is purely a partial equilibrium phenomenon, conceived in a risk neutral setting, that disappears with the introduction of sufficient risk aversion; (ii) the inability of policy makers to manage an economy with multiple firms yields a mixed equilibrium, where bonds are observed in both taxable and tax-deferred accounts; and (iii) the Pareto-efficient pension plan comprises of a defined benefit plan.