Productivity shocks and hedging: theory and evidence
This work compares two models of corporate hedging, to show how optimal investment, debt, and hedging strategy can be strongly depen-dent on the mechanism linking the firm's internal funds to its return on investment. Approximated analytical solutions for hedging are ob-tained to shed light on the di .erent empirical implications associated with the two mechanisms. The latter appear to be distinguishable by observing the correlation between investment and debt under a pro-ductivity shock. Empirical evidence on the two mechanisms provides mixed results
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