Financial Hedging and Corporate Investment

54 Pages Posted: 25 Jan 2019

See all articles by George Alexandridis

George Alexandridis

ICMA Centre, Henley Business School

Zhong Chen

King's Business School, King's College London

Yeqin Zeng

Durham University Business School, Finance and Economics

Date Written: January 16, 2019

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

Suggested Citation

Alexandridis, George and Chen, Zhong and Zeng, Yeqin, Financial Hedging and Corporate Investment (January 16, 2019). Available at SSRN: https://ssrn.com/abstract=3318257 or http://dx.doi.org/10.2139/ssrn.3318257

George Alexandridis (Contact Author)

ICMA Centre, Henley Business School ( email )

Whiteknights Campus
P.O. Box 242
Reading, RG6 6BA
United Kingdom
+44 (0) 118 378 4387 (Phone)

Zhong Chen

King's Business School, King's College London ( email )

Bush House
London, WC2B 4BG
United Kingdom

Yeqin Zeng

Durham University Business School, Finance and Economics ( email )

Office 162 Durham University Business School
Mill Hill Lane
Durham, DH1 3LB
United Kingdom

HOME PAGE: http://https://sites.google.com/site/yeqinzenghomepage/

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