Cash Flow Hedging and Liquidity Choices

David Disatnik, Ran Duchin and Breno Schmidt

Review of Finance, 2014, vol. 18, issue 2, 715-748

Abstract: This article studies the interaction between corporate hedging and liquidity policies. We present a theoretical model that shows how corporate hedging facilitates greater reliance on cost-effective, externally provided liquidity in lieu of internal resources. We test the model’s predictions by employing a new empirical approach that separates cash flow hedging from other hedging instruments. Using detailed, hand-collected data, we find that cash flow hedging reduces the firm’s precautionary demand for cash and allows it to rely more on bank lines of credit. Furthermore, we find a significant positive effect of cash flow hedging on firm value, where prior evidence is mixed.

Date: 2014
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Citations: View citations in EconPapers (35)

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