For example,in Stulz(1984),corporate hedging arises as a result of managerial risk aversion.In
Smith and Stulz(1985),the structure of the tax code(i.e.,if taxes are progressive)
or the transaction costs of financial distress could prompt firms to undertake hedging
activities. In Froot et al.(1993),hedging mitigates the under investment problem that
would result when cash flow is volatile and access to external financing is costly.
Finally,in DeMarzo and Duffie(1995), corporate hedging is optimal when managers
have private information on the firm 's expected payoff despite shareholders' ability
to hedge by themselves.