The Real and Financial Implications of Corporate Hedging
Cornell University; National Bureau of Economic Research (NBER)
Chinese University of Hong Kong (CUHK) - Department of Finance
City University of Hong Kong (CityUHK) - Department of Economics & Finance
City University of Hong Kong
NBER Working Paper No. w16622
We study the implications of hedging for firm financing and investment. We do so using an extensive, hand-collected dataset on corporate hedging activities. Hedging can lower the odds of negative firm realizations, reducing the expected costs of financial distress. In theory, this should ease a firm's access to credit. Using a tax-based instrumental variable approach, we find that hedgers pay lower interest spreads and are less likely to have capital expenditure restrictions in their loan agreements. These favorable financing terms, in turn, allow hedgers to invest more. Our tests characterize two exact channels (cost of borrowing and investment restrictions) through which hedging affects corporate outcomes. The analysis we present shows that hedging has a first-order effect on firm financing and investment, and provides new insights into how hedging affects corporate wealth. More broadly, our study contributes novel evidence on the real consequences of financial contracting.
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Number of Pages in PDF File: 35working papers series
Date posted: December 27, 2010
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