Efficiency or Resiliency? Corporate Choice between FInancial and Operational Hedging

We study the corporate choice between financial efficiency and operational resiliency. Firms substitute between saving cash for financial hedging, which mitigates the risk of financial default, and spending on operational hedging, which mitigates the risk of operational default such as a failure to deliver on obligations to customers. This tradeoff is particularly strong for financially constrained firms and results in a positive relationship between operational spread (markup) and financial leverage or credit risk. We present empirical evidence supporting this tradeoff, the effect being pronounced for constrained firms.