Dynamic risk management: investment, capital structure, and hedging in the presence of financial frictions

Amaya, Diego, Gauthier, Geneviève and Léautier, Thomas-Olivier (2012) Dynamic risk management: investment, capital structure, and hedging in the presence of financial frictions. TSE Working Paper, n. 12-330

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Official URL: http://tse-fr.eu/pub/26110

Abstract

This paper develops a dynamic risk management model to determine a firm's optimal risk management strategy. The risk management strategy has two elements: first,
until leverage is very high, the firm fully hedges its operating cash how exposure, due to the convexity in its cost of capital. When leverage exceeds a very high threshold, the
firm gambles for resurrection and stops hedging. Second, the firm manages its capital structure through dividend distributions and investment. When leverage is very low,
the firm fully replaces depreciated assets, fully invests in opportunities if they arise, and distribute dividends to reach its optimal capital structure. As leverage increases,
the firm stops paying dividends, while fully investing. After a certain leverage, the firm also reduces investment, until it stop investing completely. The model predictions are
consistent with empirical observations.

Item Type: Monograph (Working Paper)
Language: English
Date: April 2012
JEL codes: C61 - Optimization Techniques; Programming Models; Dynamic Analysis
G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSM Research (Toulouse), TSE-R (Toulouse)
Site: UT1
Date Deposited: 09 Jul 2014 17:28
Last Modified: 07 Mar 2018 13:22
OAI ID: oai:tse-fr.eu:26110
URI: http://publications.ut-capitole.fr/id/eprint/15366

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