On risk management determinants: what really matters?

Abstract

We develop a theoretical model in which debt and hedging decisions are made simultaneously, and test its predictions empirically. To address inefficiencies in current estimation methods for simultaneous equations with censored dependent variables, we build an original estimation technique based on the minimum distance estimator. Consistent with predictions drawn from our theoretical model, we show that more hedging does not always lead to a higher debt capacity. We also find that financial distress costs, information asymmetry, the presence of financial slack, corporate governance, and managerial risk aversion are important determinants of corporate hedging. Overall, our evidence shows that modeling hedging and leverage as simultaneous decisions makes a difference in analyzing corporate hedging determinants.

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