For a large sample of U.S. firms from 1994 to 2009, we empirically examine the impact of corporate hedging on the cost of public debt. We find strong evidence that hedging is associated with a lower cost of debt. The negative effect of hedging on the cost of debt is consistent across industries, and remains economically and statistically significant under various controls and econometric specifications. A cross-sectional analysis based on propensity score matching suggests that hedging initiation firms experience a drop in cost of debt, while suspension firms sustain a jump. We confirm our findings after employing an extensive array of models to address potential endogeneity. The influence of hedging on cost of debt is mainly through the lowering of bankruptcy risk and agency cost, and the reduction in information asymmetry. Finally, hedging mitigates the negative effect of rising borrowing costs on capital expenditure and firm value.

For a sample of convertible bonds issued during the period 1980 through 2002, we empirically investigate the determinants of call policy. We find that the risk of a failed call over the call notice period helps explain why firms call only after conversion value exceeds call price by a substantial safety premium. We find strong evidence that cash flow considerations and a desire to mitigate agency conflicts influence call policy. We also find evidence that the decision to issue and subsequently call a convertible bond is influenced by a desire to obtain backdoor equity financing and to finance growth options. There is no evidence, however, that firms with favorable inside information are more likely to delay calls. Finally, we find that a significant portion of calls are associated with restructuring and merger activity, and with bond rating upgrades and downgrades. In these cases, there is little if any call delay.