Derivative Cash Flows and Corporate Investment

31 Pages Posted: 2 Apr 2018 Last revised: 8 Oct 2018

See all articles by Håkan Jankensgård

Håkan Jankensgård

Lund University - Department of Business Administration; Knut Wicksell Centre for Financial Studies

Date Written: March 28, 2018

Abstract

A crucial argument for motivating hedging is that it supports corporate investment when internal cash flows are volatile and external financing is costly (Froot, Scharfstein and Stein, 1993). Despite its vast influence, the predictions of this theory have not yet been directly tested. I investigate the relationship between derivative cash flows and investment using hand-collected data from the oil and gas industry between 2000 and 2015. The data supports the theory. On average derivative cash flows make up 16% of the financing of capital expenditure, a number that rises to over 40% in crisis periods. Investment-derivative cash flow sensitivities are close to one for high-leverage firms. Derivative cash flows furthermore reduce investment tail risk, i.e. the risk of large shortfalls in capital expenditure relative its predicted value.

Keywords: Corporate hedging; derivatives; derivative cash flow; corporate investment

JEL Classification: G30, G32

Suggested Citation

Jankensgård, Håkan, Derivative Cash Flows and Corporate Investment (March 28, 2018). Available at SSRN: https://ssrn.com/abstract=3151308 or http://dx.doi.org/10.2139/ssrn.3151308

Håkan Jankensgård (Contact Author)

Lund University - Department of Business Administration ( email )

Box 117
SE-221 00 Lund, S-220 07
Sweden

Knut Wicksell Centre for Financial Studies ( email )

Box 7080
Lund, SE-220 07
Sweden

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