velocity futures markets does the fed need a structural model i introduction during the 1990s the concept of inflation targeting caught on among both monetary theorists and monetary policy makers this interest took several forms some advocated a backward looking approach as exemplified by the taylor rule which would require central bankers to offset shocks that had driven inflation away from its target path others advocated a forward looking approach whereby the central bank would target the forecast that is set policy in such a way that the optimal forecast of inflation was exactly equal to its target value this forward looking strategy could use either central bank or private forecasts of inflation some of those who advocated a forward looking strategy based on private forecasts went so far as to suggest that such a policy would eliminate any need for the central bank to develop a structural model of the economy bernanke and woodford 1997 criticized this line of analysis by suggesting that due to problems related to circularity and indeterminacy or solution multiplicity 1 a policy of targeting the forecast was not likely to be effective in this article we argue that because the circularity problem can be easily remedied a private forecast based policy is feasible and central banks do not need a structural model of the economy ii the circularity problem because monetary policy impacts the price level with a long and variable lag it is not surprising that many economists have looked for ways of incorporating private sector forecasts into the monetary policy making process taken to its logical extreme such an approach would require the central bank to adjust its policy instrument until the private sector s forecast of inflation for instance was equal to the target value at first glance the idea of replacing a bureaucratic decision making process with a simple rule based on rational expectations and efficient markets theory has great intuitive appeal bernanke and woodford however showed that there is a circularity problem associated with attempts to target private sector forecasts of inflation or any other goal variable if a policy of targeting the forecast were credible and effective then at each and every point in time the market would expect the future price level to be equal to its target value but in that case private sector forecasts would be uninformative that is they would be unable to provide the monetary authority with information about economic shocks that might impact the price level and thus would provide no guidance as to how the monetary authority could use its tools to offset those shocks on closer inspection it turns out that there are a number of distinct issues entangled in the general circularity problem for instance does the problem apply only to private sector forecasts or to central bank forecasts as well and are there ways of developing private sector forecast based policy rules that are not susceptible to the circularity problem if the answer is yes what does this imply about the widely held view that monetary authorities need to base policy on their own internal structural models of the economy svensson 1997 suggested that his inflation forecast targeting proposal was not susceptible to the circularity problem because it relied on internal central bank forecasts not private sector forecasts bernanke and woodford however showed that the effectiveness of svensson s proposal was based on the fact that central bank forecasts were derived from a structural model of the economy and that the distinction between internal and external forecasts was essentially meaningless for the circularity problem if the problem is not private sector forecasts per se then the next question is whether it is possible to set up a policy targeting rule based on private sector forecasts that avoids the circularity problem and also minimizes the need for the central bank to rely on a structural model of the economy

tax adjusted discount rates this paper develops models for discount rates that are adjusted for the interest tax shields of an infra marginal firm in a general tax equilibrium where there is cross sectional variation in corporate tax rates under the assumption that the firm optimally maintains a predetermined debt ratio a tax adjusted riskless discount rate model is given for valuing certainty equivalents and a tax and risk adjusted discount rate model is given for valuing expected cash flows for the latter case the asset equity debt and tax shield betas are derived and a weighted average cost of capital interpretation is given the tax adjusted capm apt security market lines for expected returns in stock and bond markets both have the same slope but different intercepts a formula is also provided for the present value of the interest tax shield when the firm optimally maintains a predetermined debt level the analysis here also differs from the existing literature in the following respects it allows for cross sectional variation in corporate tax rates and personal tax rates it shows that the market values of risky and riskless interest tax shields differ only to the extent that tax laws provide for nonlinear taxation of gains and losses it also shows that interest tax shields should be discounted at a tax adjusted discount rate that reflects the fact that they accrue to equity investors rather than debt investors continuous time simplifications of the formulas in this paper and the previous literature are also given

the impact of futures price targeting on the precision and credibility of monetary policy this paper analyzes the hypothesis that the targeting of macroeconomic aggregates can be done more effectively by pegging the price of a futures contract linked to future announcements of the policy target where there is an information lag futures price targeting may be more efficient than a contingent money supply rule a policy of futures price targeting would be less likely to suffer from the time inconsistency problem the use of futures price targeting would also appear to be superior to policies based on intermediate targeting as well as most types of discretion copyright 1995 by ohio state university press

a proposal to end inflation this paper suggests how the price level could be stabilized by the bank of england adopting a rule to peg the price of a new financial instrument this new instrument would be similar but not identical to a price index futures contract the paper explains how the scheme would work assesses potential objections and discusses how the bank of england could enhance the credibility of its commitment to the rule it also compares the scheme with the alternatives of targeting the monetary growth rate or targeting the price level copyright 1994 by royal economic society

inflation proof currency the feasibility of variable commodity standards under a proposal by robert l greenfield and leland b yeager 1989 the value of currency is tied to the value of a defined basket of goods by indirect convertibility the note issuing bank offers to redeem its currency for sufficient gold to buy the basket in the market the authors find that this arrangement cannot be applied to the currency that is the medium of account for quoting prices of goods and that it would imply unlimited change in the gold price when the price of the basket deviates from unity a feedback rule with slower price adjustment may however be feasible copyright 1993 by ohio state university press

hedging and liquidity this article develops a model for evaluating alternative hedging strategies for financially constrained firms a key advantage of the model is the ability to capture the intertemporal effects of hedging on the firm s financial situation we characterize the optimal hedge a wide range of alternative hedging strategies can be specified and the model allows us to determine in each case if the hedging strategy raises or lowers firm value and by how much we show that hedging firm value hedging cash flow from operations and hedging sales revenue are not optimal the article highlights the fact that every hedging strategy comes packaged with a borrowing strategy which requires careful consideration futures markets often provide the most liquid and convenient instruments for managing risk however because futures contracts are marked to market it is often impossible to simultaneously hedge cash flows and values for example a futures contract that locked in the value of gold that a corporation planned to extract in one year would generate an uncertain cash flow pattern over the year this article examines how liquidity and cash flow timing problems associated with different hedging strategies can affect a firm s value in our model the objective for hedging is to increase the firm s financial flexibility an optimal hedge maximizes the firm s liquidityslack in the form of excess cash or unused debt capacitywhen liquidity is most valuable this lowers the danger of costly financial distress reduces the effective cost of external financial constraints and makes value maximizing investments affordable a firm with no financial constraints does not gain from hedging and the higher the firm s financial constraints the greater the potential value of hedging the value of hedging depends critically on the design of the hedging strategy we show that the optimal hedge minimizes the variability in the marginal value of the firm s cash balances such a hedge efficiently redistributes cash balances across different states and periods taking cash from those states for which the marginal cost of the financial constraint is low and giving cash to those states for which the marginal

evaluating natural resource investments notwithstanding impressive advances in the theory of finance over the past 2 decades practical procedures for capital budgeting have evolved only slowly the standard technique which has remained unchanged in essentials since it was originally proposed see dean 1951 bierman and smidt 1960 derives from a simple adaptation of the fisher 1907 model of valuation under certainty under this technique expected cash flows from an investment project are discounted at a rate deemed appropriate to their risk and the resulting present value is compared with the cost of the project this standard textbook technique reflects modern theoretical developments only insofar as estimates of the discount rate may be obtained from crude application of single period asset pricing theory but see brennan 1973 bogue and roll 1974 turnbull 1977 constantinides 1978 the inadequacy of this approach to capital budgeting is widely acknowledged although not widely discussed its obvious deficiency is its the evaluation of mining and other natural resource projects is made particularly difficult by the high degree of uncertainty attaching to output prices it is shown that the techniques of continuous time arbitrage and stochastic control theory may be used not only to value such projects but also to determine the optimal policies for developing managing and abandoning them the approach may be adapted to a wide variety of contexts outside the natural resource sector where uncertainty about future project revenues is a paramount concern

firm value and hedging evidence from u s oil and gas producers this paper studies the hedging activities of 119 u s oil and gas producers from 1998 to 2001 and evaluates their effect on firm value theories of hedging based on market imperfections imply that hedging should increase the firm s market value mv to test this hypothesis we collect detailed information on the extent of hedging and on the valuation of oil and gas reserves we verify that hedging reduces the firm s stock price sensitivity to oil and gas prices contrary to previous studies however we find that hedging does not seem to affect mvs for this industry in a classic modigliani and miller m m world with perfect capital markets risk management should be irrelevant when there are no information asymmetries taxes or transaction costs hedging financial risk should not add value to the firm because shareholders can undo any risk management activities implemented by the firm at the same cost in practice imperfections in capital markets create a rationale for lowering the volatility of earnings through hedging conventional explanations relate to the cost of financial distress tax incentives and the underinvestment problem risk management may also add value if hedging positions in derivatives contracts carry a premium that is not commensurate with risk or if active trading activities create a profit most empirical studies on this topic focus on the relation between corporate hedging and firm characteristics and try to determine whether the behavior of firms that hedge is consistent with extant theories the empirical evidence does not support any single theory however in addition most of these empirical studies provide only indirect evidence that hedging increases firm value recently however allayannis and weston 2001 directly test the relation between firm value and the use of foreign currency derivatives using a sample of 720 large firms between 1990 and 1995 they find that the value of firms that hedge on average is higher by about 5 this hedging premium is statistically and economically significant with a median market value mv of about

returns to individual traders of futures aggregate results by means of a data set previously unavailable for academic research actual trading histories of individual futures traders are examined with this more detailed data the author is able to 1 test the risk return hypothesis directly 2 include a much larger segment of the market than before and 3 use actual instead of hypothetical t rading strategies it is shown that the commercial hedging traders are most profitable while noncommercial speculative traders earn n egative or zero profits because speculators are not receiving reward s for the risks they willingly absorb the theory of normal backwarda tion and its extension can be rejected copyright 1987 by university of chicago press

capital expenditures financial constraints and the use of options abstract this paper analyzes why gold mining firms use options instead of linear strategies to hedge their gold price risk consistent with financial constraints based theories the largest and least financially constrained firms are the most likely to hedge with insurance strategies put options while more constrained firms finance the purchase of puts by selling calls collars the most financially constrained firms use strategies that involve selling calls firms with large investment programs are also more likely to use insurance rather than linear strategies firms hedging instrument choices are also correlated with current market conditions suggesting that managers market views partially drive hedging instrument choices

the value of corporate risk management we model and estimate the value of corporate risk management we show how risk management can add value when revenues and costs are nonlinearly related to prices and estimate the model by regressing quarterly firm sales and costs on the second and higher moments of output and input prices for a sample of 34 oil refiners we find that hedging concave revenues and leaving concave costs exposed each represent between 2 and 3 of firm value we validate our approach by regressing tobin s q on the estimated value and level of risk management and find results consistent with the model

hedging speculation and shareholder value abstract we document that gold mining firms have consistently realized economically significant cash flow gains from their derivatives transactions we conclude that these cash flows have increased shareholder value since there is no evidence of an offsetting adjustment in firms systematic risk this finding contradicts a central assumption in the risk management literature that derivatives transactions have zero net present value and highlights an important motive for firms to use derivatives that the literature has hitherto ignored although we find considerable evidence of selective hedging in our sample the cash flow gains from selective hedging appear to be small at best

how firms should hedge substantial academic research explains why firms should hedge but little work has addressed how firms should hedge we assume that firms can experience costly states of nature and derive optimal hedging strategies using vanilla derivatives e g forwards and options and custom exotic derivative contracts for a value maximizing firm facing both hedgable price and unhedgable quantity risks customized exotic derivatives are typically better than vanilla contracts when correlations between prices and quantities are large in magnitude and when quantity risks are substantially greater than price risks finally we discuss how our model may be applied in practice copyright 2002 oxford university press

hedging financing and investment decisions theory and empirical tests abstract in this paper we theoretically and empirically examine the interaction between hedging financing and investment decisions a simple equilibrium model with costly financial distress suggests that as firms become more efficient at risky investments vis a vis low risk investments they will borrow less invest more in risky assets and hedge more the model also predicts a positive relationship between hedging and leverage a result consistent with debt capacity arguments we test the model empirically using a simultaneous equations framework to investigate the determinants of firm level hedging financing and investing decisions the results strongly support the hypothesis that the hedging financing and investment decisions are jointly determined in addition we find strong support for the central hypothesis that firms more efficient investing in risky technologies more aggressively hedge and use less debt financing in order to maximize their comparative advantage

integrated operational and financial hedging with capacity reshoring abstract we consider a multinational corporation that employs capacity reshoring production switching and financial hedging to manage supply demand mismatches and currency risk we optimize mean conditional value at risk cvar by decomposing operations and finance operational flexibility maximizes expected profit subject to a cvar constraint whereas financial hedging minimizes cvar subject to a minimum expected profit we report three main findings first operational flexibility and financial hedging can be complements operational flexibility enhances profitability and reduces downside risk while financial hedging minimizes downside risk and can affect the feasible set of capacity portfolios albeit indirectly by relaxing a cvar constraint second operational flexibility and financial hedging are substitutes in risk reduction though the latter has greater risk reduction effects in cvar when used alone third coordinating operations and finance is crucial for minimizing substitution effects efficient financial hedging depends on rigorous estimation of cash flow distribution as shaped by operational flexibility and a capacity portfolio s feasibility relies on financial hedging because of the cvar constraint

exchange rate hedging financial versus operational strategies exchange rate exposure is an important source of risk for multinational corporations to mitigate the impact of exchange rate fluctuations it has been claimed that multinational corporations can employ risk management strategies not only through financial derivatives but also through operational hedges for example schering plough in its 1995 annual report p 25 argues in support of exclusive use of operational hedges to date management has not deemed it cost effective to engage in a formula based program of hedging the profitability of these operations using derivative financial instruments some of the reasons for this conclusion are the company operates in a large number of foreign countries the currencies of these countries generally do not move in the same direction at the same time conversely many corporations with large worldwide networks such as ibm or coca cola make extensive use of derivative financial instruments this paper investigates both financial and operational exchange rate risk management strategies of multinational firms while several studies have examined either firms financial hedging or firms operational hedging activities no study thus far has examined financial and operational hedging simultaneously for a large cross section of firms to the extent that the decision to use financial hedging strategies is related to and affected by the operational strategies that a firm employs it is important to examine how each strategy contributes to the overall goal of mitigating risk and improving shareholder value using a sample of u s multinational nonfinancial firms during 1996 1998 we find that operational hedging is not an effective substitute for financial risk management however we find that the more geographically dispersed a firm is the more likely it is to use financial hedges the end result on firm value is that operational hedging strategies benefit shareholders only when used in combination with financial hedging strategies

resolving the exposure puzzle the many facets of exchange rate exposure theory predicts sizeable exchange rate fx exposure for many firms however empirical research has not documented such exposures to examine this discrepancy we extend prior theoretical results to model a global firm s fx exposure and show empirically that firms pass through part of currency changes to customers and utilize both operational and financial hedges for a typical sample firm pass through and operational hedging each reduce exposure by 10 15 financial hedging with foreign debt and to a lesser extent fx derivatives decreases exposure by about 40 the combination of these factors reduces fx exposures to observed levels

conditional cooperation with negative externalities an experiment abstract empirically the commons are not as tragic as standard theory predicts the predominant explanation for this finding is conditional cooperation yet many real life situations involve insiders who are directly affected by a dilemma and outsiders who may be harmed if the insiders overcome the dilemma the quintessential illustration is oligopoly if insiders overcome their dilemma and collude this inflicts harm on the opposite market side in our experiment harm on outsiders significantly reduces conditional cooperation of insiders we can exclude that this result is driven by inequity aversion reciprocity or efficiency seeking only guilt aversion can rationalize our findings with guilt being most pronounced if the active insiders not only inflict harm on the outsider but increase their own payoff at the expense of the outsider

capacity decisions with debt financing the effects of agency problem abstract this paper studies the capacity management problem for a firm that uses debt financing this is done by analyzing the effect of the associated agency problem when making capacity decisions the agency problem arises when there are potential conflicts of interest between the firm owner and the lender we show that this agency problem can constrain the firm s optimal capacity decision because the borrowing rate will increase as the risk of default increases with capacity level chosen the firm will therefore try to optimally choose the level so as to reduce the risk of bankruptcy which the lender will take into account and as a consequence the firm will try to control the risk associated with potentially high borrowing costs however even when the expected bankruptcy cost is carefully controlled the optimal capacity decision is still made at the risk of incurring considerable agency costs in addition the corporate tax level can also play a significant role in capacity choice we show that although a higher tax rate leads to bigger tax benefit of debt and lower agency cost it also gives rise to a higher tax liability after balancing the tax benefit of debt with the agency cost the firm can make an optimal decision on the capacity level required the efficacy of financial hedging for mitigating the agency cost is also analyzed finally we compare and contrast our analysis with existing studies and it appears that we have been able to obtain a deeper insight into the problem

accounting for non interest bearing currency a critique of the legal restrictions theory of money the legal restrictions theory of money developed by neil wallace and others implies that all noncommodity currency would be interest bear ing under laissez faire if the interest rate on bonds is positive this note cites historical evidence to the contrary it then analyzes the source of the legal restrictions theory s inapplicability and o ffers an alternative computation cost based explanation for nonintere st bearing currency copyright 1987 by ohio state university press

corporate financial hedging with proprietary information abstract if a firm has information pertinent to its own dividend stream that is not made available to its shareholders it may be in the interests of the firm and its shareholders to adopt a financial hedging policy this is in contrast with the modigliani miller theorem which implies that with informational symmetry such financial hedging is irrelevant in certain cases hedging policies are identified that are unanimously supported by shareholders

an integrated model of multinational flexibility and financial hedging abstract we construct a model of a multinational firm with flexibility in sourcing its production and with the ability to use financial markets to hedge exchange rate risk agency costs generated by the firm s capital structure create a link between the firm s financial policy and its production decisions the firm s need for hedging is directly related to the degree of flexibility and the production plan it chooses is a function of the hedging strategy it employs consequently the firm s ability to exploit its competitive position depends upon the degree to which its flexibility is matched by the construction of an appropriate hedging strategy

supply chain network equilibrium with strategic financial hedging using futures abstract in this paper we develop a network equilibrium model for supply chain networks with strategic financial hedging we consider multiple competing firms that purchase multiple materials and parts to manufacture their products the supply chain firms procurement activities are exposed to commodity price risk and exchange rate risk the firms can use futures contracts to hedge the risks our research studies the equilibrium of the entire network where each firm optimizes its own operation and hedging decisions we use variational inequality theory to formulate the equilibrium model and provide qualitative properties we provide analytical results for a special case with duopolistic competition and use simulations to study an oligopolistic case the analytical and simulation studies reveals interesting managerial insights

taking a view corporate speculation governance and compensation using responses to a well known confidential survey we study corporations use of derivatives to take a view on interest rate and currency movements characteristics of speculators suggest that perceived information and cost advantages lead them to take positions actively that is they do not speculate to increase risk by betting the ranch speculating firms encourage managers to speculate through incentive aligning compensation arrangements and bonding contracts and they use derivatives specific internal controls to manage potential abuse finally we examine whether investors reading public corporate disclosures are able to identify firms that indicate speculating in the confidential survey they are not derivative instruments can be used to hedge market risk exposures or to spec ulate on movements in the value of the underlying asset to hedge generally implies that the derivative position is taken with the intention of reducing risk to speculate generally implies that the derivative position is undertaken with the primary intention of making a profit or increasing risk speculation has a pejorative connotation in the financial press yet it is not clear that this repu tation is deserved in this paper we explore whether speculation is an activity that is optimal ex ante but for which we should expect to observe some large negative outcomes ex post or whether it is an activity that will decrease ex pected shareholder value to the benefit of agents of the firm that is whether it is evidence of an agency problem and governance failure the extant theoretical and empirical literature presents an abundance of ev idence about why firms should and do use derivatives to hedge 1 we know

using futures prices to control inflation reply to garrison and white in a recent paper garrison and white g w 1997 offered a thoughtful and skeptical assessment of several recent proposals to use price index futures contracts to achieve price level targets their main focus is a scheme put forward by sumner 1995 but they also addressed a scheme that i suggested dowd 1994 1995 and made substantial criticisms of price index futures schemes in general sumner 1997 has already replied to those that pertain to his scheme and this reply responds to those that pertain to mine 1 the objective of my scheme is to achieve price stability whilst also making the monetary system fully automatic and so doing away with discretionary monetary policy this objective would be achieved by the central bank pegging the price of price index futures contracts and then relying on private sector arbitrage to ensure that the money supply is consistent with a stable expected price level the actual price level would then be equal to this expected price level plus or minus a hopefully small random error

cash holdings and credit risk intuition suggests that rms with higher cash holdings are safer and should have lower credit spreads yet empirically the correlation between cash and spreads is robustly positive and higher for lower credit ratings this puzzling nding can be explained by the precautionary motive for saving cash in our model endogenously determined optimal cash reserves are positively related to credit risk resulting in a spurious positive correlation between cash and spreads by contrast spreads are negatively related to the exogenous component of cash holdings independent of credit risk factors similarly although rms with higher cash reserves are less likely to default over short horizons longer term endogenously determined liquidity may be positively related to the probability of default our empirical analysis conrms these predictions suggesting that endogenous precautionary savings are central to understanding the eects of cash on credit risk

the impact of derivatives on firm risk an empirical examination of new derivative users abstract the appropriateness of financial reporting rules for derivative securities depends on corporations reasons for using the instruments empirically little is documented about how the instruments affect firms risk exposures this study examines derivatives roles in firms initiating derivatives use the results are consistent with firms using derivatives to hedge and not to increase entity risk firm risk measured several ways declines following derivatives use realized risk reductions and decisions to initiate derivatives programs vary across firms with the expected benefits from hedging the findings emphasize the importance of hedge accounting rules that incorporate the impact of derivatives and hedged items simultaneously

dynamic asset pricing with non redundant forwards abstract in an incomplete market in which non redundant forward contracts contribute to span the uncertainty some standard results of portfolio theory must be amended when the investment opportunity set is driven by k state variables a k 3 mutual fund separation theorem is obtained in lieu of merton s k 2 fund separation result the additional fund is a portfolio that hedges the interest rate risk brought about by the optimal portfolio strategy itself second the mean variance efficiency of the market portfolio of cash assets is neither a necessary nor a sufficient condition for the linear relationship between expected return and beta to hold third the pricing equation for a forward contract is shown to contain an extra term relative to that for a cash asset term we name strategy risk premium

tax incentives to hedge for corporations facing tax function convexity hedging lowers expected tax liabilities thereby providing an incentive to hedge we use simulation methods to investigate convexity induced by tax code provisions on average the tax function is convex although in approximately 25 percent of cases it is concave carrybacks and carryforwards increase the range of income with incentives to hedge other tax code provisions have minor impacts among firms facing convex tax functions average tax savings from a five percent reduction in the volatility of taxable income are about 5 4 percent of expected tax liabilities in extreme cases these savings exceed 40 percent if a firm faces a convex tax function then hedging that reduces the volatility of taxable income reduces the firm s expected tax liability for a firm facing some form of tax progressivity when taxable income is low its effective marginal tax rate will be low but when income is high its tax rate will be high if such a firm hedges the tax increase in circumstances where income would have been low is smaller than the tax reduction in circumstances where income would have been high thus lowering expected taxes in examining the importance of various motives to hedge researchers have employed two general methods survey and regression analysis there are potential problems with each for example some managers might view the information requested in a survey as proprietary or might hesitate to admit that they employ derivatives to speculate rather than hedge to employ regression methods researchers must generate proxies for tax status in addition to other firm characteristics to the extent that a tax variable e g whether the firm has a net operating loss carryforward proxies for factors such as financial distress as well as tax circumstances analysts face an identification problem in interpreting the results

corporate risk management integrating liquidity hedging and operating policies we analyze the value created by a dynamic integrated risk management strategy involving liquidity management derivatives hedging and operating flexibility in the presence of several frictions we show that liquidity serves a critical and distinct role in risk management justifying high levels of cash we find that the marginal value associated with derivatives hedging is likely to be low though we explain why some empirical studies find a higher value we explore the complex interactions between operating flexibility and financial risk management finding that substitution effects are nonmonotonic and are affected by operating leverage the nature of operating flexibility and the effectiveness of the hedging instrument this paper was accepted by jerome detemple finance

do firms hedge in response to tax incentives there are two tax incentives for corporations to hedge to increase debt capacity and interest tax deductions and to reduce expected tax liability if the tax function is convex we test whether these incentives affect the extent of corporate hedging with derivatives using an explicit measure of tax function convexity we find no evidence that firms hedge in response to tax convexity our analysis does however indicate that firms hedge to increase debt capacity with increased tax benefits averaging 1 1 percent of firm value our results also indicate that firms hedge because of expected financial distress costs and firm size an increasing number of corporations use financial derivatives each year the international swaps and derivatives association reports that the notional value of outstanding otc swap contracts increased from 11 3 trillion in 1994 to more than 60 trillion by mid 2000 http 00www isda org this is interesting because financial theory tells us that corporate risk management enhances value only in the presence of costly market imperfections a number of empirical studies examine derivative holdings to identify which of the proposed theoretical incentives and imperfections lead to corporate hedging our paper adds to the hedging literature by testing whether corporations respond to two tax related incentives to hedge the incentive to reduce volatility thereby increasing debt capacity and the tax benefits of debt and the incentive to reduce expected tax liabilities by reducing the volatility of taxable income we also use a refined dependent variable to measure net

operational hedges and the foreign exchange exposure of u s multinational corporations this paper examines the impact of operational hedges of us multinational corporations mncs on their exchange rate exposure the two important contributions of this study are first it documents the importance of operational hedges as significant determinants of exchange rate risk as measured by breadth and depth dimensions of the mnc foreign subsidiary network second this finding remains robust even after examining the impact of operational hedges on exposure separately for negatively and positively exposed mncs

guilt in games a clear conscience is a good pillow why does this old proverb contain an insight the emotion of guilt holds a key psychologists report that the prototypical cause of guilt would be the infliction of harm loss or distress on a relationship partner roy baumeister arlene m stillwell and todd f heatherton 1994 245 june price tangney 1995 moreover guilt is unpleasant and may affect behavior to render the associated pangs counterfactual baumeister stillwell and heatherton state if people feel guilt for hurting their partners and for failing to live up to their expectations they will alter their behavior to avoid guilt in ways that seem likely to maintain and strengthen the relationship avoided guilt is the down of the sound sleeper s bolster how can guilt be modeled how are human interaction and economic outcomes influenced we offer a formal approach for providing answers start with an extensive game form which associates a monetary outcome with each end node say that player i lets player j down if as a result of i s choice of strategy j gets a lower monetary payoff than j expected to get before play started player i s guilt may depend on how much he lets j down player i s guilt may also depend on how much j believes i believes he lets j down we develop techniques to analyze equilibria when players are motivated in part by a desire to avoid guilt the intellectual home for our exercise is what has been called psychological game theory this framework originally developed by john geanakoplos david pearce and ennio stacchetti 1989 and recently extended by battigalli and dufwenberg 2005 henceforth b d allows players utilities to depend on beliefs about choices states of nature

the costs of bankruptcy chapter 7 liquidation versus chapter 11 reorganization our paper explores a comprehensive sample of small and large corporate bankruptcies in arizona and new york from 1995 to 2001 bankruptcy costs are very heterogeneous and sensitive to the measurement method used we find that chapter 7 liquidations appear to be no faster or cheaper in terms of direct expense than chapter 11 reorganizations however chapter 11 seems to preserve assets better thereby allowing creditors to recover relatively more our paper also provides a large number of further empirical regularities our paper analyzes the largest sample of corporate bankruptcies to date we research approximately 300 cases from the arizona and new york federal bankruptcy courts from 1995 to 2001 these cases consist of 1 both publicly traded and privately held corporations and 2 both chapter 7 liquidations and chapter 11 reorganizations this sample is practically the entire population of unique corporate bankruptcies in these courts our paper s primary objective is to measure how the two available bankruptcy procedures differ especially but not only in terms of cost we explore four variables namely the change in the estate s value during bankruptcy a measure of indirect costs the time spent in bankruptcy another and more common measure of indirect costs the expenses submitted to and approved by the bankruptcy court a measure of direct costs and the recovery rates for creditors and apr violations our most important findings are that chapter 7 liquidations are not cheaper than chapter 11 reorganizations particularly after we control for endogenous self selection of firms into bankruptcy procedure bankruptcy professionals attorneys accountants trustees regularly end up with most of the post bankruptcy firm s value in chapter 7 arturo bris is at imd yale school of management and ecgi ivo welch is at brown uni