TY - JOUR
T1 - Forward Contracts and Firm Value
T2 - Investment Incentive and Contractina Effects
AU - Bessembinder, Hendrik
PY - 1991
Y1 - 1991
N2 - Corporate risk hedging with forward contracts increases value by reducing incentives to underinvest. This occurs because the hedge decreases the sensitivity of senior claim value to incremental investment, allowing equity holders to capture a larger portion of the incremental benefit from new investment. Hedging also allows the firm to credibly commit to meet obligations in states where it otherwise could not, which improves contract terms the firm can negotiate with customers, creditors, and managers. These benefits cannot be duplicated by individual hedging, and each result holds independent of agents' risk preferences.
AB - Corporate risk hedging with forward contracts increases value by reducing incentives to underinvest. This occurs because the hedge decreases the sensitivity of senior claim value to incremental investment, allowing equity holders to capture a larger portion of the incremental benefit from new investment. Hedging also allows the firm to credibly commit to meet obligations in states where it otherwise could not, which improves contract terms the firm can negotiate with customers, creditors, and managers. These benefits cannot be duplicated by individual hedging, and each result holds independent of agents' risk preferences.
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U2 - 10.2307/2331409
DO - 10.2307/2331409
M3 - Article
AN - SCOPUS:84959669053
SN - 0022-1090
VL - 26
SP - 519
EP - 532
JO - Journal of Financial and Quantitative Analysis
JF - Journal of Financial and Quantitative Analysis
IS - 4
ER -