Corporate Hedging and Productivity Shocks: Implications on Investment and Debt

This work compares two models of corporate hedging, to show how optimal investment, debt, and hedging strategy can be strongly dependent on the mechanism linking the firm’s internal funds to its return on investment. Approximated analytical solutions for hedging and a numerical example simulating the effects of a productivity shock are obtained to shed light on the different empirical implications associated to the two mechanisms. The latter appear to be distinguishable by observing the extent of hedging for equal values of the relevant parameters, and the correlation between investment and debt in a period of technological change.