Title

The effect of financial hedging on the incentives for corporate diversification: The role of stakeholder firm-specific investments

Publication Type

Journal Article

Publication Date

2007

Abstract

Financial hedging and corporate diversification are often considered substitutive means of risk management, implying that rapid development of financial hedging markets will yield less need for firms to manage risk through costly diversification. Building on a stakeholder-based view of risk management, we show that financial hedging and corporate diversification are more often complementary than substitutive. Financial hedging reduces a firm’s systematic risk, encouraging firm-specific investment by stakeholders. Larger firmspecific investment loads excessive idiosyncratic risk on the stakeholders, increasing the benefits of reducing idiosyncratic risk through diversification. Therefore, financial hedging can increase a firm’s incentives to manage risk through diversification.

Keywords

Risk management, Financial hedging, Corporate diversification, Stakeholders, Firm-specific investments

Discipline

Business Administration, Management, and Operations | Finance and Financial Management

Research Areas

Finance

Publication

Journal of Economic Behavior & Organization

Volume

62

Issue

4

First Page

640

Last Page

656

ISSN

0167-2681

Identifier

10.1016/j.jebo.2005.04.012

Publisher

Elsevier