Journal of Financial Intermediation Vol. 20 No. 3 2011
Liquidity management and corporate demand for hedging and insurance
open access
Abstract
We analyze the demand for hedging and insurance by a firm facing cash-flow risks. We study how the firm’s liquidity management policy interacts with two types of risk: a Brownian risk that can be hedged through a financial derivative, and a Poisson risk that can be insured by an insurance contract. We find that the patterns of insurance and hedging decisions are pole apart: cash-poor firms should hedge but not insure, whereas the opposite is true for cash-rich firms. We also find non-monotonic effects of profitability. This may explain the mixed findings of empirical studies on corporate demand for hedging and insurance.
- DOI
- 10.1016/j.jfi.2010.11.001
- Volume
- 20
- Issue
- 3
- Pages
- 303-323
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref