Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/230224 
Year of Publication: 
2021
Citation: 
[Journal:] Journal of Business Finance & Accounting [ISSN:] 1468-5957 [Volume:] 48 [Issue:] 3-4 [Publisher:] Wiley [Place:] Hoboken, NJ [Year:] 2021 [Pages:] 718-741
Publisher: 
Wiley, Hoboken, NJ
Abstract: 
We present a new approach to test empirically the financial distress costs theory of corporate hedging. We estimate the ex-ante expected financial distress costs, which serve as a starting point to construct further explanatory variables in an equilibrium setting, as a fraction of the value of an asset-or-nothing put option on the firm's assets. Using single-contract data of the derivatives' use of 189 German middle-market companies that stems from a major bank as well as Basel II default probabilities and historical accounting information, we are able to explain a significant share of the observed cross-sectional differences in hedge ratios. Hence, our analysis adds further support for the financial distress costs theory of corporate hedging from the perspective of a financial intermediary.
Subjects: 
bankruptcy costs
corporate hedging
financial distress
derivatives
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
Document Version: 
Published Version

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