Gold loans in the Australian gold mining industry: Do gold loans allow gold producers to increase leverage?

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Abstract

This paper tests the hypothesis that gold producers exhibit greater leverage where gold loans are used. As the choice of gold producers and the study period essentially avoids debt tax shield effects, the paper focuses on information asymmetry and agency costs explanations for leverage. Theory suggests hedging can reduce the cost of debt but it has little impact if management is not committed to adopting the promised hedging policy. The implicit hedge in gold loans commits management to hedging and so greater leverage is expected for producers adopting gold loans. Results from the analysis are consistent with this hypothesis.

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