Hedging, Financing, and Investment Decisions: A Simultaneous Equations Framework

32 Pages Posted: 30 Mar 2007

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Abstract

We empirically investigate the interaction between hedging, financing, and investment decisions. This empirical study is suitable because the general theoretical predictions have not been derived yet, and due to the interaction effects, they may not be necessary identical to those which were derived for each decision in isolation. We argue that the way in which hedging affects a firm's financing and investing decisions differs for firms with different growth opportunities. We empirically find that high growth firms increase their investment, but not leverage, by hedging. However, we also find that firms with few investment opportunities use derivatives to increase their leverage.

Keywords: Hedging, Risk management, Investment, Financing

JEL Classification: D84, G31, G32

Suggested Citation

Lin, Chen-Miao and Smith, Stephen Dewitt, Hedging, Financing, and Investment Decisions: A Simultaneous Equations Framework. Financial Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=976306

Chen-Miao Lin (Contact Author)

Clayton State University ( email )

2000 Clayton State Boulevard
Morrow, GA 30260
United States

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