Hedging, financing, and investment decisions: a simultaneous equations framework

Chen-Miao Lin and Stephen D. Smith

No 2005-05, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: The purpose of this paper is to empirically investigate the interaction between hedging, financing, and investment decisions. This work is relevant in that theoretical predictions are not necessarily identical to those in the case where only two decisions are being made. We argue that the way in which hedging affects the firms? financing and investing decisions differs for firms with different growth opportunities. We empirically find that high-growth firms increase their investment, but not their leverage, by hedging. However, we also find that firms with few investment opportunities use derivatives to increase their leverage.

Date: 2005
New Economics Papers: this item is included in nep-fin and nep-rmg
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