The underinvestment problem and corporate derivatives use.

From: Financial Management | Date: December 22, 1998| Author: Gay, Gerald D.; Nam, Jouahn | Copyright information

This paper finds that corporate derivatives use is driven in part by the need to avoid possible underinvestment problems. Derivatives use is greater (1) the greater the firm's investment opportunity, (2) the more restricted the availability of internally generated cash in relation to its investment opportunities, and (3) the lower the correlation between cash flows and investment expenses. (Reprinted by permission of the publisher.)

In a perfect world such as that of Modigliani and ...

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