Financial Hedging and Corporate Investment

George Alexandridis; Zhong Chen; Yeqin Zeng

doi:10.1016/j.jcorpfin.2021.101887

Financial Hedging and Corporate Investment

George Alexandridis, Zhong Chen, Yeqin Zeng

Accounting & Financial Management

Research output: Contribution to journal › Article › peer-review

7 Citations (Scopus)

31 Downloads (Pure)

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. While 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.

Original language	English
Article number	101887
Journal	Journal of Corporate Finance
Volume	67
Early online date	8 Feb 2021
DOIs	https://doi.org/10.1016/j.jcorpfin.2021.101887
Publication status	Published - Apr 2021

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10.1016/j.jcorpfin.2021.101887

Financial Hedging and Corporate_ALEXANDRIDIS_2021_GREEN AAMAccepted author manuscript, 596 KBLicence: CC BY-NC-ND

https://durham-repository.worktribe.com/output/1253864/financial-hedging-and-corporate-investment

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@article{10ee0d7b31b64e83acf930f1688a79c3,

title = "Financial Hedging and Corporate Investment",

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. While 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.",

author = "George Alexandridis and Zhong Chen and Yeqin Zeng",

note = "Funding Information: We would like to thank Bart Lambrecht (the Editor) and two anonymous referees of this journal, Leonidas Barbopoulos, S{\"o}hnke Bartram, Stefano Bonini, Sherry Chan, Siu Kai Choy, Cl{\'a}udia Cust{\'o}dio, Tarik Driouchi, Eliezer M. Fich, Paul Guest, Andreas Hoepner, Dirk Jenter, Kai Li, Gerald Lobo, Hugo Montesinos, Duc Duy Nguyen, Maria Nykyforovych, Carol Padgett, Oksana Pryshchepa, Raghavendra Rau, Stefano Rossi, Henri Servaes, Vathunyoo Sila, Nickolaos Travlos, Lenos Trigeorgis, Chunling Xia, David Yermack, Steven Young, Hong Zou, and seminar participants at the ICMA Centre, University of Birmingham, 2017 AAA annual conference, 2017 FMA annual conference, 2017 FMA Asia/Pacific conference, 2017 FMA Europe conference, and 2017 EFMA conference for their insightful and constructive comments. We especially thank Christopher Ball for providing the access to MetaHeuristica software, and Yi Liu, Zhongyi Qian, and Yawen Shi for research assistance. The financial support from Durham University Business School, ICMA Centre, and King's Business School is gratefully acknowledged. Funding Information: ? We would like to thank Bart Lambrecht (the Editor) and two anonymous referees of this journal, Leonidas Barbopoulos, S?hnke Bartram, Stefano Bonini, Sherry Chan, Siu Kai Choy, Cl?udia Cust?dio, Tarik Driouchi, Eliezer M. Fich, Paul Guest, Andreas Hoepner, Dirk Jenter, Kai Li, Gerald Lobo, Hugo Montesinos, Duc Duy Nguyen, Maria Nykyforovych, Carol Padgett, Oksana Pryshchepa, Raghavendra Rau, Stefano Rossi, Henri Servaes, Vathunyoo Sila, Nickolaos Travlos, Lenos Trigeorgis, Chunling Xia, David Yermack, Steven Young, Hong Zou, and seminar participants at the ICMA Centre, University of Birmingham, 2017 AAA annual conference, 2017 FMA annual conference, 2017 FMA Asia/Pacific conference, 2017 FMA Europe conference, and 2017 EFMA conference for their insightful and constructive comments. We especially thank Christopher Ball for providing the access to MetaHeuristica software, and Yi Liu, Zhongyi Qian, and Yawen Shi for research assistance. The financial support from Durham University Business School, ICMA Centre, and King's Business School is gratefully acknowledged. Publisher Copyright: {\textcopyright} 2021 Elsevier B.V. Copyright: Copyright 2021 Elsevier B.V., All rights reserved.",

year = "2021",

month = apr,

doi = "10.1016/j.jcorpfin.2021.101887",

language = "English",

volume = "67",

journal = "Journal of Corporate Finance",

issn = "0929-1199",

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AU - Alexandridis, George

AU - Chen, Zhong

AU - Zeng, Yeqin

N1 - Funding Information: We would like to thank Bart Lambrecht (the Editor) and two anonymous referees of this journal, Leonidas Barbopoulos, Söhnke Bartram, Stefano Bonini, Sherry Chan, Siu Kai Choy, Cláudia Custódio, Tarik Driouchi, Eliezer M. Fich, Paul Guest, Andreas Hoepner, Dirk Jenter, Kai Li, Gerald Lobo, Hugo Montesinos, Duc Duy Nguyen, Maria Nykyforovych, Carol Padgett, Oksana Pryshchepa, Raghavendra Rau, Stefano Rossi, Henri Servaes, Vathunyoo Sila, Nickolaos Travlos, Lenos Trigeorgis, Chunling Xia, David Yermack, Steven Young, Hong Zou, and seminar participants at the ICMA Centre, University of Birmingham, 2017 AAA annual conference, 2017 FMA annual conference, 2017 FMA Asia/Pacific conference, 2017 FMA Europe conference, and 2017 EFMA conference for their insightful and constructive comments. We especially thank Christopher Ball for providing the access to MetaHeuristica software, and Yi Liu, Zhongyi Qian, and Yawen Shi for research assistance. The financial support from Durham University Business School, ICMA Centre, and King's Business School is gratefully acknowledged. Funding Information: ? We would like to thank Bart Lambrecht (the Editor) and two anonymous referees of this journal, Leonidas Barbopoulos, S?hnke Bartram, Stefano Bonini, Sherry Chan, Siu Kai Choy, Cl?udia Cust?dio, Tarik Driouchi, Eliezer M. Fich, Paul Guest, Andreas Hoepner, Dirk Jenter, Kai Li, Gerald Lobo, Hugo Montesinos, Duc Duy Nguyen, Maria Nykyforovych, Carol Padgett, Oksana Pryshchepa, Raghavendra Rau, Stefano Rossi, Henri Servaes, Vathunyoo Sila, Nickolaos Travlos, Lenos Trigeorgis, Chunling Xia, David Yermack, Steven Young, Hong Zou, and seminar participants at the ICMA Centre, University of Birmingham, 2017 AAA annual conference, 2017 FMA annual conference, 2017 FMA Asia/Pacific conference, 2017 FMA Europe conference, and 2017 EFMA conference for their insightful and constructive comments. We especially thank Christopher Ball for providing the access to MetaHeuristica software, and Yi Liu, Zhongyi Qian, and Yawen Shi for research assistance. The financial support from Durham University Business School, ICMA Centre, and King's Business School is gratefully acknowledged. Publisher Copyright: © 2021 Elsevier B.V. Copyright: Copyright 2021 Elsevier B.V., All rights reserved.

PY - 2021/4

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AB - 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. While 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.

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M3 - Article

SN - 0929-1199

VL - 67

JO - Journal of Corporate Finance

JF - Journal of Corporate Finance

M1 - 101887

ER -

Financial Hedging and Corporate Investment

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