Do Firms Use Derivatives to Reduce Their Dependence on External Capital Markets?

35 Pages Posted: 18 Feb 1999

Date Written: January 2002

Abstract

This study investigates if the use of derivatives by corporations is likely to affect their financing strategies. I find a strong positive relation between the minimum revenue guaranteed by hedging and investment expenditures. This result implies that hedging increases the likelihood that investments can be financed internally. I also find that firms tend to finance their investment expenditures externally rather than internally. If external capital is more costly than internal capital it would clearly be in a firm's interest to reduce its dependence on external capital. Consistent with this result, I find that the median firm that does not hedge finances 100% of its investment expenditures externally, while the median firm that hedges finances only 86% of investments externally.

JEL Classification: G32

Suggested Citation

Adam, Tim, Do Firms Use Derivatives to Reduce Their Dependence on External Capital Markets? (January 2002). Available at SSRN: https://ssrn.com/abstract=147851 or http://dx.doi.org/10.2139/ssrn.147851

Tim Adam (Contact Author)

Humboldt University ( email )

Dorotheentr. 1
Berlin, Berlin 10099
Germany
+49 (0)30 2093-5641 (Phone)
+49 (0)30 2093-5643 (Fax)

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