Authors: Hahnenstein, Lutz
Köchling, Gerrit
Posch, Peter N.
Title: Do firms hedge in order to avoid financial distress costs? New empirical evidence using bank data
Language (ISO): en
Abstract: We present a new approach to test empirically the financial distress costs theory of corporate hedging. We estimate the ex-ante expected financial distress costs, which serve as a starting point to construct further explanatory variables in an equilibrium setting, as a fraction of the value of an asset-or-nothing put option on the firm's assets. Using single-contract data of the derivatives' use of 189 German middle-market companies that stems from a major bank as well as Basel II default probabilities and historical accounting information, we are able to explain a significant share of the observed cross-sectional differences in hedge ratios. Hence, our analysis adds further support for the financial distress costs theory of corporate hedging from the perspective of a financial intermediary.
Subject Headings: Bankruptcy costs
Corporate hedging
Financial distress
Subject Headings (RSWK): Insolvenz
Issue Date: 2020-08-11
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Appears in Collections:Professur Finance

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