Strategic Risk Management and Product Market Competition

How does competition affect corporate risk management strategies? The the-oretical literature has derived conflicting predictions. Allayannis and Ihrig (2001) predict that firms operating in more competitive industries are more likely to hedge, while Mello and Ruckes (2008) predict that firms hedge less if competition is more intense. Adam, Dasgupta, and Titman (2007) show that competition can have a positive or negative impact on the number of firms that hedge in equilibrium. While the theoretical literature has produced conflicting answers, anecdotal evidence suggests that the competitive environment does affect firms’ hedging strategies. For example, Brown (2001) reports that competitive pricing concerns in the product market, rather than the traditional models of hedging, determine how a major durable goods producer in the US hedges its FX exposures.