The Real and Financial Implications of Corporate Hedging / Murillo Campello, Chen Lin, Yue Ma, Hong Zou.

Format:

Book

Author/Creator:

Campello, Murillo.

Contributor:

National Bureau of Economic Research.

Lin, Chen.

Ma, Yue.

Zou, Hong.

Series:

Working Paper Series (National Bureau of Economic Research) no. w16622.

NBER working paper series no. w16622

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2010.

Summary:

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.

Notes:

Print version record

December 2010.