The Real and Financial Implications of Corporate Hedging

49 Pages Posted: 29 Jan 2010

See all articles by Murillo Campello

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management; National Bureau of Economic Research (NBER)

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Yue Ma

City University of Hong Kong (CityUHK) - Department of Economics & Finance

Hong Zou

Lingnan University, Department of Finance and Insurance

Multiple version iconThere are 3 versions of this paper

Date Written: January 28, 2010

Abstract

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

Campello, Murillo and Lin, Chen and Ma, Yue and Zou, Hong, The Real and Financial Implications of Corporate Hedging (January 28, 2010). Available at SSRN: https://ssrn.com/abstract=1544048 or http://dx.doi.org/10.2139/ssrn.1544048

Murillo Campello (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

114 East Avenue
369 Sage Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Yue Ma

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

HOME PAGE: http://www.cb.cityu.edu.hk/staff/yuema24

Hong Zou

Lingnan University, Department of Finance and Insurance ( email )

Castle Peak Road
Tuen Mun, New Territories
Hong Kong
China

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