In a context of uncertain returns to investment, a firm may face increasing costs of borrowing and uncertain value of its internal finance. Froot, Scharfstein, and Stein (1993) develop a framework where the firm can hedge against the fluctuations of its cash flow, in order to better coordinate...

By trading derivatives on the financial markets, a firm can hedge against the fluctuations of its internal funds, in order to better coordinate investment and financing decisions. This work shows how optimal investment, debt and hedging strategy can be strongly dependent on the mechanism linking...