Review of Finance Vol. 6 No. 2 2002
Do Firms Use Derivatives to Reduce their Dependence on External Capital Markets?
Abstract
This study investigates if the use of derivatives by corporations is likely to affect their financing strategies. I find a strong positive relation between the minimum revenue guaranteed by hedging and investment expenditure. This result implies that hedging increases the likelihood that investments can be financed internally. I also find that firms tend to finance their investment expenditures externally rather than internally. If external capital is more costly than internal capital it would clearly be in a firm's interestto reduce its dependence on external capital. Consistent with this result, Ifind that the median firm that does not hedge finances 100% of its investment expenditures externally, while the median firm that hedges finances only 86% of investments externally.
- DOI
- 10.1023/a:1020121007127
- Volume
- 6
- Issue
- 2
- Pages
- 163-187
- Language
- en
- Sources
- openalex bibtex:phds-export.bib crossref