Corporate risk management,product market competition,and disclosure |
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| Institution: | 1. Department of Economics and Finance, Tobin College of Business, St. John''s University, Queens, NY 11439, USA;2. Department of Finance, Muma College of Business, University of South Florida, Tampa, FL 33620, USA;1. Department of Finance, New York University Stern School of Business, 44 West 4th St., #9-84, New York, NY 10012, United States;2. CEPR, United Kingdom;3. NBER, United States;4. Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045, United States;1. Federal Deposit Insurance Corporation, Washington, DC, United States;2. Villanova School of Business, Villanova University, Villanova, PA, United States;3. George Mason University, Department of Economics, Fairfax, VA, United States;4. U.S. Securities and Exchange Commission, Washington, DC, United States |
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| Abstract: | This paper studies the effects of hedge disclosure requirements on corporate risk management and product market competition. The analysis is based on a model of market entry and shows that to prevent entry incumbent firms engage in risk management when these activities remain unobserved by outsiders. In the resulting equilibrium, financial markets are well informed and entry is efficient. However, potential attempts for more transparency by additional disclosure requirements introduce a commitment device that provides incumbents with incentives to distort risk management activities thereby influencing entrant beliefs. In equilibrium, firms engage in significant risk-taking. This behavior limits entry and adversely affects the nature of competition in industries. |
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