1,721,007 research outputs found
Is it possible to reduce the stock of foreign reserves?
No full textThis work determines the optimal reserves to short term debt ratio of an exporting economy indebted in foreign currency and suggests possible remedies to reduce it. Theoretical results and numerical simulations establish that the ratios recently observed reflect the increasing weight assigned to the risk of firms going bankrupt. They also establish that neither a lower risk premium charged by international lenders nor a lower exchange rate volatility reduce the stock of reserves significantly. Full elimination of the need to hold reserves to prevent financial crises should rely either on limiting foreign capital inflow or on reforming the international monetary system
Theoretical explanations of corporate hedging
No full textThis study surveys theoretical models providing alternative rationales for corporate hedging.
Across the revised models, corporate hedging is defined, variously, as any insurance contract, as any activity reducing the correlation of the firm value with some random variable and as holding derivative financial instruments.
Alternative models can be separated into those arguing that reducing risk at the corporate level may be value-enhancing (failure of the Modigliani-Miller theorem) and those arguing that corporate hedging is an outgrowth of shareholder-manager conflicts (failure of the Fisher Separation theorem). Few studies model or simply suggest possible incentives to increase risks through derivatives.
This survey emphasises the relevance of models that do not focus on the firm’s capital structure only, but rather conceive hedging as a tool to coordinate both financial capital and investment. This stream is potentially important to interlink financial and real decisions under uncertainty.
A thorough examination of the contributions within the so called “managerial risk aversion hypothesis”, often interpreted as providing similar predictions, reveals that different, sometimes opposite, predictions can be identified and lead to the conclusion that most of the empirical tests on corporate hedging based on stock options can be considered uninformative on the managerial incentives to hedge
Determinants of Hedging and Its Effects on Investment and Debt
No full textFroot et al. [J. Finance 48 (1993) 1629] develop a framework in which a firm trades derivatives on the financial markets to coordinate its investing and financing decisions. This work specifies this framework by assuming that the firm faces a risk of going bankrupt. By deriving an approximated analytical solution, some properties of the optimal hedging strategy and the effects of hedging on a firm's investing and financing behaviour are developed and discussed. Numerical simulations of the nonclosed-form optimal solution are also obtained to validate the approximation
Bank credit, financial flows, and distribution of income in the Eurozone
No full textUsing a flow-consistent dataset consisting of sectorial data covering Germany, France, Italy, and Spain over a 27 years span (1995–2021), this study examines how firms and households compete for funding when bank credit contracts and the government’s role in this conflict. It distinguishes between gross flows from bank credit and noncredit sources, including security liabilities and internal funds. The findings show that during credit slowdowns, firms (i) replace bank credit with nonloan liabilities and (ii) increase internal funds by diverting income from households. The latter result occurs through revenue concentration among larger firms and by limiting the value-added distribution to households. Except in Spain, households maintained consumption patterns, making consumption countercyclical post-2008, although sharply disrupted by fiscal austerity in 2012–13. Overall, fiscal policies favored large corporations: during industrial consolidation, they eased distributional tensions, while in periods of income decline or stagnation, they shifted the burden onto households
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