Corporate Resiliency and the Choice Between Financial and Operational Hedging

Viral V. Acharya, Heitor Almeida, Yakov Amihud, and Ping Liu

♦ We investigate how firms manage financial default risk (on debt obligations) and operational default risk (on delivery obligations). Financially constrained firms reduce operational hedging through adjustments to inventory and supply chains in favor of cash holdings. Thus, firms’ markup increases with financial default risk because they cut operational hedging costs. This effect strengthens during adverse aggregate shocks, and that markup reacted more strongly to credit risk for firms that became financially constrained when they were shocked in the 2008 Financial Crisis.

Read it here.