Time-inconsistent investment, financial constraints, and cash flow hedging

Donald Lien*, Chia Feng Jeffrey Yu

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

8 Citations (Scopus)


This paper studies the interplay between firm investment and cash flow hedging decisions when the decision-maker has time-inconsistent preferences. We show that cash flow hedging acts as a double-edged sword. In some cases, cash flow hedging enhances firm value because the firm can thus invest at the firm-value-maximizing timing. In other cases, however, cash flow hedging may adversely affect firm value because it loosens the financial constraint that works as a commitment device to mitigate premature investment. Our results thus highlight one unexplored potential dark side of hedging and suggest that the optimal hedging decision is the result of a trade-off between flexibility and commitment.

Original languageEnglish
Pages (from-to)72-79
Number of pages8
JournalInternational Review of Financial Analysis
Publication statusPublished - 1 Oct 2014
Externally publishedYes


  • Cash flow hedging
  • Financial constraints
  • Investment timing
  • Time-inconsistent preferences


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