The real and financial implications of corporate hedging

Murillo CAMPELLO, Chen LIN, Yue MA, Hong ZOU

Research output: Journal PublicationsJournal Article (refereed)

81 Citations (Scopus)

Abstract

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.
Original languageEnglish
Pages (from-to)1615-1647
Number of pages33
JournalJournal of Finance
Volume66
Issue number5
DOIs
Publication statusPublished - 1 Jan 2011

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Hedging
Corporate hedging
Financing
Borrowing
Tax
Low pay
Corporate value
Access to credit
Financial distress
Costs
Cost channel
Instrumental variables
Order effects
Capital expenditures
Financial contracting
Loans

Cite this

CAMPELLO, Murillo ; LIN, Chen ; MA, Yue ; ZOU, Hong. / The real and financial implications of corporate hedging. In: Journal of Finance. 2011 ; Vol. 66, No. 5. pp. 1615-1647.
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The real and financial implications of corporate hedging. / CAMPELLO, Murillo; LIN, Chen; MA, Yue; ZOU, Hong.

In: Journal of Finance, Vol. 66, No. 5, 01.01.2011, p. 1615-1647.

Research output: Journal PublicationsJournal Article (refereed)

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