Asymmetric Information: A Rationale for Firms' Hedging and Speculation
1992 (English)Report (Other academic)
This paper studies corporate hedging when investors cannot observe firms' hedging strategies but only realized profits. It is shown that managers acting in the best interest of shareholders will sometimes choose speculative positions even when hedging can be obtained at actuarially fair prices. The explanation is that a higher profit from a successful speculation can affect the market's inference about the firm and increase its equity value. Equilibrium stock prices will then be less informative about real investment opportunities, and a potential welfare cost arises in form of either overinvestment or underinvestment in new capital.
Place, publisher, year, edition, pages
Stockholm: IIES , 1992. , 23 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University, ISSN 0347-8769 ; 516
IdentifiersURN: urn:nbn:se:su:diva-41834OAI: oai:DiVA.org:su-41834DiVA: diva2:337922
Published in connection with a visit at the IIES.2010-08-102010-08-102010-08-10