Financial Hedging and Corporate Investment

62 Pages Posted: 25 Jan 2019 Last revised: 22 Dec 2019

See all articles by George Alexandridis

George Alexandridis

ICMA Centre, Henley Business School

Zhong Chen

King's Business School, King's College London

Yeqin Zeng

Durham University Business School, Finance and Economics

Date Written: January 16, 2019

Abstract

Building on the well-documented relationship between corporate financial hedging and firms’ borrowing costs, this study examines the impact of utilizing financial derivative instruments on corporate investment. We document that engaging in financial hedging enables firms to pursue more inorganic growth opportunities in the form of M&As. Acquiring firms with financial hedging programs have a lower borrowing cost and are more likely to pay for their deals with cash and use external borrowing. Although financial hedging serves as a vehicle for firms to bring their inorganic investment plans to fruition by facilitating their financing, it also leads to inferior investment choices when conflicts of interest among managers and shareholders are more likely to arise. Our study shows for the first time that the financial flexibility emanating from corporate financial hedging can give rise to agency costs by instigating entrenched managers to overinvest.

Keywords: Corporate Financial Hedging, Mergers and Acquisitions, Method of Payment, Financial Flexibility

JEL Classification: G11, G32, G34

Suggested Citation

Alexandridis, George and Chen, Zhong and Zeng, Yeqin, Financial Hedging and Corporate Investment (January 16, 2019). Available at SSRN: https://ssrn.com/abstract=3318257 or http://dx.doi.org/10.2139/ssrn.3318257

George Alexandridis (Contact Author)

ICMA Centre, Henley Business School ( email )

Whiteknights Campus
P.O. Box 242
Reading, RG6 6BA
United Kingdom
+44 (0) 118 378 4387 (Phone)

Zhong Chen

King's Business School, King's College London ( email )

Bush House
London, WC2B 4BG
United Kingdom

Yeqin Zeng

Durham University Business School, Finance and Economics ( email )

Office 162 Durham University Business School
Mill Hill Lane
Durham, DH1 3LB
United Kingdom

HOME PAGE: http://https://sites.google.com/site/yeqinzenghomepage/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
153
Abstract Views
1,405
rank
238,041
PlumX Metrics