The Real and Financial Implications of Corporate Hedging
49 Pages Posted: 29 Jan 2010
Date Written: January 28, 2010
Does hedging affect corporate outcomes? This paper looks at the consequences of hedging for firm financing and investment. It does so using detailed, hand-collected data on hedging and loan contracts. Hedging can reduce the odds of negative profit realizations, reducing the expected costs of financial distress. In theory, this should ease a firm's access to credit. Using a tax-based instrumental variables 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 results identify two channels (cost of borrowing and investment restrictions) through which hedging affects firm outcomes. The study provides new evidence on the real consequences of financial contracting.
Keywords: Hedging, risk management, financing terms, investment spending, instrumental variables
JEL Classification: G31
Suggested Citation: Suggested Citation