Financial Hedging and Corporate Investment

Abstract

Mergers and acquisitions (M&As) comprise the most important form of corporate investment. Their capital intensiveness makes deal financing decisions central to the M&A process. Building on the well-documented relationship between corporate financial hedging and firms' borrowing costs, this study examines the impact of utilizing financial derivatives instruments on M&A financing choices and the likelihood of undertaking acquisition investments. Our results show that engaging in financial hedging enables firms to pursue inorganic growth opportunities in the form of M&As. Acquiring firms with financial hedging programs are more likely to pay for their deals with cash and use external borrowing which appears to be largely driven by the impact of financial hedging on their borrowing cost. Our study contributes to existing literature by establishing that financial hedging could serve as an effective vehicle for firms to bring their inorganic investment plans to fruition by facilitating their financing.

Keywords: Corporate Financial Hedging, Mergers and Acquisitions, Method of Payment

JEL Classification: G11, G32, G34