The Real and Financial Implications of Corporate Hedging

Murillo Campello, Chen Lin, Yue Ma and Hong Zou

No 16622, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: G31 G32 G33 (search for similar items in EconPapers)
Date: 2010-12
Note: CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published as 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.

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