Cash Flow Hedging and Liquidity Choices

Forthcoming, Review of Finance

44 Pages Posted: 1 Aug 2009 Last revised: 19 Dec 2012

See all articles by David Disatnik

David Disatnik

Tel Aviv University - Faculty of Management

Ran Duchin

University of Washington - Michael G. Foster School of Business

Breno Schmidt

Emory University - Goizueta Business School

Date Written: December 19, 2012

Abstract

This paper studies the interaction between corporate hedging and liquidity policies. We present a theoretical model that shows how corporate hedging facilitates greater reliance on cost-effective, externally-provided liquidity in lieu of internal resources. We test the model's predictions by employing a new empirical approach that separates cash flow hedging from other hedging instruments. Using detailed, hand-collected data, we find that cash flow hedging reduces the firm’s precautionary demand for cash and allows it to rely more on bank lines of credit. Furthermore, we find a significant positive effect of cash flow hedging on firm value, where prior evidence is mixed.

Keywords: derivative, hedging, cash, credit line, liquidity

JEL Classification: G30, G31, G32

Suggested Citation

Disatnik, David J. and Duchin, Ran and Schmidt, Breno, Cash Flow Hedging and Liquidity Choices (December 19, 2012). Forthcoming, Review of Finance. Available at SSRN: https://ssrn.com/abstract=1442166 or http://dx.doi.org/10.2139/ssrn.1442166

David J. Disatnik

Tel Aviv University - Faculty of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel

Ran Duchin (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Breno Schmidt

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1,095
Abstract Views
4,870
rank
20,040
PlumX Metrics