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Do Firms Use Derivatives to Reduce their Dependence on External Capital Markets?

Tim R. Adam

Review of Finance, 2002, vol. 6, issue 2, 163-187

Abstract: This study investigates if the use of derivatives by corporations is likely to affect their financing strategies. I find a strong positive relation between the minimum revenue guaranteed by hedging and investment expenditure. This result implies that hedging increases the likelihood that investments can be financed internally. I also find that firms tend to finance their investment expenditures externally rather than internally. If external capital is more costly than internal capital it would clearly be in a firm's interestto reduce its dependence on external capital. Consistent with this result, Ifind that the median firm that does not hedge finances 100% of its investment expenditures externally, while the median firm that hedges finances only 86% of investments externally. JEL classification codes: G32

Date: 2002
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