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1998 U. Ill. L. Rev. 1039 (1998)
Derivatives, Corporate Hedging, and Shareholder Wealth: Modigliani-Miller Forty Years Later

handle is hein.journals/unilllr1998 and id is 1049 raw text is: DERIVATIVES, CORPORATE HEDGING, AND SHAREHOLDER WEALTH: MODIGLIANI-MILLER FORTY YEARS LATER Kimberly D. Krawiec* In this article, Professor Krawiec evaluates the relationship be- tween derivatives hedging and shareholder wealth through an anal- ysis of both the legal and financial academic literature. She contends that legal commentators who argue that corporate deriva- tives use requires a broad rethinking of traditional corporate law norms are mistaken. She further contends that if adopted by future courts judging management decisions regarding corporate hedging, such arguments raise a severe danger of undermining the business judgment rule as applied to management hedging decisions. She notes that much of the legal evaluation of derivatives hedging has focused on pure financial benefit to the corporate entity, without considering the costs and benefits to shareholders. Professor Krawiec attempts to remedy that weakness by identifying the vari- ous benefits that may accrue to shareholders from firm-level risk reduction through derivatives hedging. She suggests profiles of companies most likely to generate shareholder benefits through de- rivatives hedging. She then analyzes the empirical evidence of ac- tual firm hedging practices to determine whether this behavior fits the company profiles previously developed. Professor Krawiec discusses the implications of her analysis for corporate decision- making and for legal policy. She concludes that firm-level risk re- duction through derivatives hedging is a business decision, often benefitting shareholders, that should be protected by the business judgment rule as is any other disinterested, well-informed, invest- ment or operating decision made in good faith by corporate management. We must admit that we too were somewhat taken aback when we first saw this conclusion emerging from our analysis.... By 1963, however, with corporate debt ratios in the late 1950s not much * Assistant Professor, University of Oregon School of Law. B.A. North Carolina State University; J.D. Georgetown University Law Center. I would like to thank Professors Paul G. Mahoney and Richard W. Painter for helpful comments on earlier drafts of this article. I would also like to thank Maggie Finnerty and Phil Van Trease for superb research assistance. 1039

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