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Financial Hedging and Corporate Investment  

Alexandridis, George; Chen, Zhong; Zeng, Yeqin

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Authors

George Alexandridis

Zhong Chen



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.

Citation

Alexandridis, G., Chen, Z., & Zeng, Y. (2021). Financial Hedging and Corporate Investment  . Journal of Corporate Finance, 67, Article 101887. https://doi.org/10.1016/j.jcorpfin.2021.101887

Journal Article Type Article
Acceptance Date Jan 5, 2021
Online Publication Date Jan 19, 2021
Publication Date 2021-04
Deposit Date Jan 12, 2021
Publicly Available Date Jan 19, 2023
Journal Journal of Corporate Finance
Print ISSN 0929-1199
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 67
Article Number 101887
DOI https://doi.org/10.1016/j.jcorpfin.2021.101887
Public URL https://durham-repository.worktribe.com/output/1253864
Related Public URLs https://dx.doi.org/10.2139/ssrn.3318257

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