Advanced

Asset Illiquidity and Corporate Hedging

Jankensgård, Håkan LU and Hagströmer, Björn LU (2011)
Abstract
Distressed firms that are forced to liquidate assets in inefficient markets often have to accept prices that are substantially lower than the fair asset value. This asset illiquidity discount aggravates the financial situation of such firms and should be accounted for in risk management. This paper is the first to analyze financial hedging as a tool for avoiding exposure to the asset illiquidity discount. In our model the firm trades off the benefit of lowering the probability of asset fire sales against the cost of underinvestment resulting from the drain on cash when the firm buys insurance. We use the case of Saga Petroleum ASA, a Norwegian oil exploration company, to illustrate this tradeoff.
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Working Paper
publication status
unpublished
subject
keywords
hedging, risk management, financial distress, underinvestment, Asset illiquidity
language
English
LU publication?
yes
id
2fcaba23-ed6f-4e6e-994e-2a023ea41bd0 (old id 1785178)
date added to LUP
2011-02-10 12:57:44
date last changed
2016-04-16 12:25:13
@misc{2fcaba23-ed6f-4e6e-994e-2a023ea41bd0,
  abstract     = {Distressed firms that are forced to liquidate assets in inefficient markets often have to accept prices that are substantially lower than the fair asset value. This asset illiquidity discount aggravates the financial situation of such firms and should be accounted for in risk management. This paper is the first to analyze financial hedging as a tool for avoiding exposure to the asset illiquidity discount. In our model the firm trades off the benefit of lowering the probability of asset fire sales against the cost of underinvestment resulting from the drain on cash when the firm buys insurance. We use the case of Saga Petroleum ASA, a Norwegian oil exploration company, to illustrate this tradeoff.},
  author       = {Jankensgård, Håkan and Hagströmer, Björn},
  keyword      = {hedging,risk management,financial distress,underinvestment,Asset illiquidity},
  language     = {eng},
  title        = {Asset Illiquidity and Corporate Hedging},
  year         = {2011},
}