The Real and Financial Implications of Corporate Hedging
We study the implications of hedging for firm financing and investment. We do so using an extensive, hand-collected dataset on corporate hedging activities. Hedging can lower the odds of negative firm realizations, reducing the expected costs of financial distress. In theory, this should ease a firm's access to credit. Using a tax-based instrumental variable approach, we find that hedgers pay lower interest spreads and are less likely to have capital expenditure restrictions in their loan agreements. These favorable financing terms, in turn, allow hedgers to invest more. Our tests characterize two exact channels (cost of borrowing and investment restrictions) through which hedging affects corporate outcomes. The analysis we present shows that hedging has a first-order effect on firm financing and investment, and provides new insights into how hedging affects corporate wealth. More broadly, our study contributes novel evidence on the real consequences of financial contracting.
We thank Mitchell Petersen (the editor) and an anonymous referee for very constructive comments. We also thank Yiorgos Allayannis, Kevin Aretz, Matthew Billett, Henry Cao, Sudheer Chava, Erasmo Giambona, John Graham, Victoria Ivashina, Michelle Lowry, Manju Puri, Douglas Rolph, René Stulz, Tom Vinaimont, Michael Weisbach, and Yuhai Xuan for their suggestions. Comments from seminar participants at Chinese University of Hong Kong, CKGSB, ICCFFM Conference, SAIF, and University of Hong Kong are also appreciated. Hoi Kit Lo, Chunning Ma, and Pennie Wong provided excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Murillo Campello & Chen Lin & Yue Ma & Hong Zou, 2011. "The Real and Financial Implications of Corporate Hedging," Journal of Finance, American Finance Association, vol. 66(5), pages 1615-1647, October. citation courtesy of