Risk management and optimal capital structure under ambiguity

Abstract

This study examines how managers’ perceived ambiguity influences risk management policies and capital structure decisions. After deriving the optimal hedge ratio and leverage ratio under ambiguity, we show the relationship between our results and recent studies. Our result supports the empirical evidence of a negative relationship between ambiguity and leverage ratio. We also find that the efficiency of hedging is an important factor when examining the value of hedging under ambiguity. The literature shows that the value of hedging increases with ambiguity; however, this result holds only when the efficiency of hedging is large, as in a full-hedge strategy.