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The Determinants of Firms' Hedging Policies
Clifford W. Smith and Rene M. Stulz
The Journal of Financial and Quantitative Analysis
Vol. 20, No. 4 (Dec., 1985), pp. 391-405
Published by: Cambridge University Press on behalf of the University of Washington School of Business Administration
Stable URL: http://www.jstor.org/stable/2330757
Page Count: 15
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We develop a positive theory of the hedging behavior of value-maximizing corporations. We treat hedging by corporations simply as one part of the firm's financing decisions. We examine (1) taxes, (2) contracting costs, and (3) the impact of hedging policy on the firm's investment decisions as explanations of the observed wide diversity of hedging practices among large, widely-held corporations. Our theory provides answers to the questions: (1) why some firms hedge and others do not; (2) why firms hedge some risks but not others; and (3) why some firms hedge their accounting risk exposure while others hedge their economic value.
The Journal of Financial and Quantitative Analysis © 1985 University of Washington School of Business Administration