Concepedia

The Real and Financial Implications of Corporate Hedging

Murillo Campello, Chen Lin, Yue Ma, Hong Zou

The Journal of Finance · 2011 · 368 citations · 38 references

Open access

TL;DR

Hedging reduces the likelihood of negative profit realizations and expected financial distress costs, potentially easing firms’ access to credit. The study investigates whether hedging affects corporate outcomes, specifically firm financing and investment. Using detailed, hand‑collected data on hedging and loan contracts and a tax‑based instrumental‑variables approach, the authors examine hedgers’ interest spreads and capital‑expenditure restrictions. Hedgers obtain lower interest spreads and fewer capital‑expenditure restrictions, leading to greater investment; the study identifies borrowing‑cost and restriction channels and provides new evidence on the real consequences of financial contracting.

Abstract

Does hedging affect corporate outcomes? This paper looks at the consequences of hedging for firm financing and investment. It does so using detailed, hand-collected data on hedging and loan contracts. Hedging can reduce the odds of negative profit realizations, reducing the expected costs of financial distress. In theory, this should ease a firm's access to credit. Using a tax-based instrumental variables 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 results identify two channels (cost of borrowing and investment restrictions) through which hedging affects firm outcomes. The study provides new evidence on the real consequences of financial contracting.