The Real and Financial Implications of Corporate Hedging

Authors

  • MURILLO CAMPELLO,

  • CHEN LIN,

  • YUE MA,

  • HONG ZOU

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    • Campello is with Cornell University & NBER; Lin is with Chinese University of Hong Kong; Ma is with Lingnan University, Hong Kong; and Zou is with City University of Hong Kong. We thank Mitchell Petersen (the Acting Editor) and an anonymous referee for very constructive comments. We also thank Yiorgos Allayannis, Kevin Aretz, Matthew Billett, Henry Cao, Sudheer Chava, Erasmo Giambona, John Graham, Victoria Ivashina, Michelle Lowry, Manju Puri, Douglas Rolph, René Stulz, Tom Vinaimont, Michael Weisbach, and Yuhai Xuan for their suggestions. Comments from seminar and conference participants at Chinese University of Hong Kong, CKGSB, ICCFFM Conference (2010), SAIF, and University of Hong Kong are also appreciated. Hoi Kit Lo, Chunning Ma, and Pennie Wong provided excellent research assistance. The financial support from City University of Hong Kong (Start up grant 7200165) is gratefully acknowledged.


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.

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