Publication Type
Journal Article
Version
publishedVersion
Publication Date
4-2007
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
Corporate Finance | Finance and Financial Management
Research Areas
Finance
Publication
Journal of Economic Behavior and Organization
Volume
62
Issue
4
First Page
640
Last Page
656
ISSN
0167-2681
Identifier
10.1016/j.jebo.2005.04.012
Publisher
Elsevier
Citation
LIM, Sonya Seongyeon and WANG, Heli.
The effect of financial hedging on the incentives for corporate diversification: The role of stakeholder firm-specific investments. (2007). Journal of Economic Behavior and Organization. 62, (4), 640-656.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/3455
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1016/j.jebo.2005.04.012