The Real and Financial Implications of Corporate Hedging

By Murillo Campello, Chen Lin, Yue Ma, H. Zou. 2011

326 citations recorded by the source corpus.

We study the implications of hedging for firm financing and investment. We do so using an extensive, hand-collected dataset on corporate hedging activities. Hedging can lower the odds of negative firm realizations, 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 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 tests characterize two exact channels (cost of borrowing and investment restrictions) through which hedging affects corporate outcomes. The analysis we present shows that hedging has a first-order effect on firm financing and investment, and provides new insights into how hedging affects corporate wealth. More broadly, our study contributes novel evidence on the real consequences of financial contracting.

Subfields: Accounting

View Paper: https://www.semanticscholar.org/paper/d7bc7998ac97baf04ae44f91e6b457401315d56f

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In Accounting

1. Jun Chen
2. T. D. King
3. Söhnke M. Bartram

Citations in the corpus

• Political connections and the cost of bank loans (2014, unknown): “In line with the findings by Campello et al., (2011), our findings provide additional confirmation that political connections are positively valued by creditors and that these assessments might ultimately translate into gains for corporate shareholders by ameliorating liquidity policies”
• Corporate hedging and the cost of debt (2014, methodology): “The same instrument is also adopted by Campello et al. (2011).”
• Corporate social responsibility and CEO confidence (2017, unknown): “For example, Allayannis and Weston (2001), Carter et al. (2006), Adam and Fernando (2006), Bartram et al. (2011), Campello et al. (2011) and Perez-Gonzalez and Yun (2013) all report that hedging increases firm value.”
• Corporate Liquidity Management: A Conceptual Framework and Survey (2014, unknown): “Campello et al. (2011a) try to gauge the various dimensions of corporate liquidity management during the 2008–2009 Financial Crisis.”
• Policy uncertainty and loan loss provisions in the banking industry (2020, unknown): “…addition, borrowers and banks might be able to hedge against interest rate uncertainty via interest rate swaps or credit default swaps (Guay, 1999; Campello et al., 2011; Rampini et al., 2017), which, in turn, mitigates the likelihood and/or extent to which monetary policy uncertainty per se…”
• Corporate Ownership Structure and the Choice Between Bank Debt and Public Debt (2013, unknown): “Since financial distress risk and information opacity raise controlling shareholders’ tunneling incentives and at the same time increase the expected monitoring from banks (e.g., Campello et al., 2011; Lin et al., 2012), controlling shareholders’ incentives to elude monitoring also increase.”