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The Real and Financial Implications of Corporate Hedging

We study the implications of hedging for corporate financing and investment. We do so using an extensive, hand‐collected data set on corporate hedging activities. Hedging can lower the odds of negative realizations, thereby reducing the expected costs of financial distress. In theory, this should ea... Full description

Journal Title: Journal of Finance October 2011, Vol.66(5), pp.1615-1647
Main Author: Campello, Murillo
Other Authors: Lin, Chen , Ma, Yue , Zou, Hong
Format: Electronic Article Electronic Article
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ID: ISSN: 0022-1082 ; E-ISSN: 1540-6261 ; DOI: 10.1111/j.1540-6261.2011.01683.x
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recordid: wj10.1111/j.1540-6261.2011.01683.x
title: The Real and Financial Implications of Corporate Hedging
format: Article
creator:
  • Campello, Murillo
  • Lin, Chen
  • Ma, Yue
  • Zou, Hong
subjects:
  • Corporate Finance
  • Financing Methods
  • Financial Management
  • Access to Credit
  • Hedging
  • Investment Strategies
  • Firm Value
  • Economics
ispartof: Journal of Finance, October 2011, Vol.66(5), pp.1615-1647
description: We study the implications of hedging for corporate financing and investment. We do so using an extensive, hand‐collected data set on corporate hedging activities. Hedging can lower the odds of negative realizations, thereby 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 show 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 shows that hedging has a first‐order effect on firm financing and investment, and provides new insights into how hedging affects corporate value. More broadly, our study contributes novel evidence on the real consequences of financial contracting.
language:
source:
identifier: ISSN: 0022-1082 ; E-ISSN: 1540-6261 ; DOI: 10.1111/j.1540-6261.2011.01683.x
fulltext: fulltext
issn:
  • 0022-1082
  • 00221082
  • 1540-6261
  • 15406261
url: Link


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descriptionWe study the implications of hedging for corporate financing and investment. We do so using an extensive, hand‐collected data set on corporate hedging activities. Hedging can lower the odds of negative realizations, thereby 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 show 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 shows that hedging has a first‐order effect on firm financing and investment, and provides new insights into how hedging affects corporate value. More broadly, our study contributes novel evidence on the real consequences of financial contracting.
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subjectCorporate Finance ; Financing Methods ; Financial Management ; Access to Credit ; Hedging ; Investment Strategies ; Firm Value ; Economics;
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abstractWe study the implications of hedging for corporate financing and investment. We do so using an extensive, hand‐collected data set on corporate hedging activities. Hedging can lower the odds of negative realizations, thereby 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 show 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 shows that hedging has a first‐order effect on firm financing and investment, and provides new insights into how hedging affects corporate value. More broadly, our study contributes novel evidence on the real consequences of financial contracting.
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pubBlackwell Publishing Inc
doi10.1111/j.1540-6261.2011.01683.x
pages1615-1647
date2011-10