Financial Constraints, Competition, and Hedging in Industry Equilibrium





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    • Adam is from the MIT Sloan School of Management; Dasgupta from the Hong Kong University of Science & Technology (HKUST); and Titman from the University of Texas. We are grateful to Axel Adam-Müller, Söhnke Bartram, Nittai Bergman, Dirk Jenter, Peter Mackay, Gordon Phillips, James Vickery, Keith Wong, and an anonymous referee for valuable suggestions that greatly improved the paper. We would also like to thank seminar participants at HKUST, MIT, National University of Singapore, Tel Aviv University, University of Mainz, and the annual meetings of the American, European, and Western Finance Associations for their comments and discussions. Any remaining errors are our own.


We analyze the hedging decisions of firms, within an equilibrium setting that allows us to examine how a firm's hedging choice depends on the hedging choices of its competitors. Within this equilibrium some firms hedge while others do not, even though all firms are ex ante identical. The fraction of firms that hedge depends on industry characteristics, such as the number of firms in the industry, the elasticity of demand, and the convexity of production costs. Consistent with prior empirical findings, the model predicts that there is more heterogeneity in the decision to hedge in the most competitive industries.