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On the Determinants of Corporate Hedging

Authors

  • DEANA R. NANCE,

  • CLIFFORD W. SMITH JR.,

  • CHARLES W. SMITHSON

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    • Nance is from Lousiana Tech University, Smith is from The University of Rochester, and Smithson is from Chase Manhattan Bank. We wish to thank J. Binder, M. Flannery, R. Lease, W. Marr, K. Mitchel, J. Pringle, L. Wall, D. Mayers (the editor), and two anonymous referees for their comments and suggestions. The research was partially supported by the John M. Olin Foundation, the Lynde and Harry Bradley Foundation, and the Managerial Economics Research Center at the Simon School.


ABSTRACT

Finance theory indicates that hedging increases firm value by reducing expected taxes, expected costs of financial distress, or other agency costs. This paper provides evidence on these hypotheses using survey data on firm's use of forwards, futures, swaps, and options combined with COMPUTSTAT data on firm characteristics. Of 169 firms in the sample, 104 firms use hedging instruments in 1986. The data suggest that firms which hedge face more convex tax functions, have less coverage of fixed claims, are larger, have more growth options in their investment opportunity set, and employ fewer hedging substitutes.

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