Hahnenstein, LutzKöchling, GerritPosch, Peter N.2022-06-022022-06-022020-08-11http://hdl.handle.net/2003/4093510.17877/DE290R-22785We 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.enJ Bus Fin Account;48(3-4)https://creativecommons.org/licenses/by/4.0/Bankruptcy costsCorporate hedgingFinancial distressDerivatives330article (journal)InsolvenzHedging