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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