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Robust investment and hedging policy with limited commitment

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  • Ma, Jinrun
  • Wu, Yaoyao
  • Liang, Yongtang

Abstract

This study examines the impacts of ambiguity aversion on corporate investment and risk management when human capital cannot be alienated. An entrepreneur is concerned about model misspecifications and seeks robust decisions. At optimality, the entrepreneur lowers the maximal debt capacity, invests less and underconsumes in response to ambiguity concerns. When the firm becomes more financially constrained, these distortions are higher. Finally, we quantitatively show that the hedging positions are nonmonotonic in ambiguity aversion because of the interaction between ambiguity and limited commitment frictions.

Suggested Citation

  • Ma, Jinrun & Wu, Yaoyao & Liang, Yongtang, 2023. "Robust investment and hedging policy with limited commitment," Economic Modelling, Elsevier, vol. 125(C).
    • Handle: RePEc:eee:ecmode:v:125:y:2023:i:c:s0264999323001566
    DOI: 10.1016/j.econmod.2023.106344
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    References listed on IDEAS

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    More about this item

    Keywords

    Ambiguity; Limited commitment; Investment; Consumption; Risk hedging;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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