How Does Information Asymmetry Affect Corporate Hedging?
54 Pages Posted: 26 Apr 2021 Last revised: 12 May 2021
Date Written: May 18, 2020
We revisit the unsettled question of the effects of information asymmetry on corporate hedging by testing three relevant theories. Exploiting mergers or closures of brokerage firms as plausibly exogenous information asymmetry events, we find that treatment firms significantly reduce derivative-based hedging, compared with matched control firms. Lower hedging is concentrated in firms that are ex ante subject to (1) lower collateral, more financial constraints and better growth opportunities or (2) lower collateral and a lower-quality CEO. Treatment firms that have a high-quality CEO and are not subject to collateral constraints increase hedging after the shock, consistent with the hypothesis that hedging signals superior managerial quality. Overall, our findings highlight the complex relationship between information asymmetry and corporate hedging.
Keywords: Information asymmetry, collateral, risk management, hedging, analysts
JEL Classification: G30, G32, K22
Suggested Citation: Suggested Citation