The Real and Financial Implications of Corporate Hedging

42 Pages Posted: 17 Mar 2010 Last revised: 2 Jan 2011

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

The University of Hong Kong Faculty of Business and Economics

Multiple version iconThere are 3 versions of this paper

Date Written: December 31, 2010

Abstract

We study the implications of hedging for corporate financing and investment. We do so using an extensive, hand-collected dataset on corporate hedging activities. Hedging can lower the odds of negative realizations, thereby 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 show 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 value. More broadly, our study contributes novel 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 (December 31, 2010). Forthcoming, Journal of Finance. Available at SSRN: https://ssrn.com/abstract=1570535

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

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

Hong Kong

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