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Journal of Finance Vol. 62 No. 5 2007

Financial Constraints, Competition, and Hedging in Industry Equilibrium

Tim Adam1,2,3,4; Sudipto Dasgupta1,2,3,4; Sheridan Titman1,2,3,5,4

1 National University of Singapore · 2 Johannes Gutenberg University Mainz · 3 Hong Kong University of Science and Technology · 4 University of Hong Kong · 5 Engineering Systems (United States)

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Abstract

We analyze the hedging decisions of firms, within an equilibrium setting that allows us to examine how a firm's hedging choice depends on the hedging choices of its competitors. Within this equilibrium some firms hedge while others do not, even though all firms are ex ante identical. The fraction of firms that hedge depends on industry characteristics, such as the number of firms in the industry, the elasticity of demand, and the convexity of production costs. Consistent with prior empirical findings, the model predicts that there is more heterogeneity in the decision to hedge in the most competitive industries.

DOI
10.1111/j.1540-6261.2007.01280.x
Volume
62
Issue
5
Pages
2445-2473
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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