Corporate hedging, investment and value

Jose M. Berrospide, Amiyatosh Purnanandam and Uday Rajan
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Jose M. Berrospide: https://www.federalreserve.gov/econres/jose-m-berrospide.htm

No 2008-16, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We consider the effect of hedging with foreign currency derivatives on Brazilian firms in the period 1997 through 2004, a period that includes the Brazilian currency crisis of 1999. We find that, derivative users have valuations that are 6.7-7.8% higher than non-user firms. Hedging with currency derivatives allows firms to sustain larger capital investments, and also removes the sensitivity of investment to internally generated funds. Thus, it mitigates the underinvestment friction of Froot, Scharfstein, and Stein (1993), at a time when capital in the economy as a whole is scarce. We further show that hedging increases the foreign currency debt capacity of a firm, and that foreign debt is a cheaper source of capital than domestic debt during our period of study.

Keywords: Hedging (Finance); Corporations - Finance (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (2)

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