Kenneth A. Froot, David S. Scharfstein, Jeremy C. Stein

Bibliographic Information

NBER Working Paper No. 4084
Issued in May 1992
NBER Program(s):CF, IFM


  • Journal of Finance, December 1993, vol 48, 1629-1658 citation courtesy of
  • The Theory of Corporate Finance, M.J. Brennan, from the series The International Library of Critical Writings in Financial Economcics, R. Roll, editor, 1995.

Available Formats


This paper develops a general framework for analyzing corporate risk management policies. We begin by observing that if external sources of finance are more costly to corporations than internally generated funds, there will typically be a benefit to hedging: hedging adds value to the extent that it helps ensure that a corporation has sufficient internal funds available to take advantage of attractive investment opportunities. We then argue that this simple observation has wide-ranging implications for the design of risk management strategies. We delineate how these strategies should depend on such factors as shocks to investment and financing opportunities. We also discuss exchange-rate hedging strategies for multinationals. as well as strategies involving "nonlinear" instruments like options.

National Bureau of Economic Research
1050 Massachusetts Ave.
Cambridge, MA 02138

Twitter RSS

View Full Site: One timeAlways