← Search

Review of Finance Vol. 18 No. 2 2014

Cash Flow Hedging and Liquidity Choices

David Disatnik; Ran Duchin; Breno Schmidt

1 The Leon Recanati Graduate School of Business Administration, Tel Aviv University, 2Foster School of Business, University of Washington, and 3Goizueta Business School, Emory University

Abstract

This article studies the interaction between corporate hedging and liquidity policies. We present a theoretical model that shows how corporate hedging facilitates greater reliance on cost-effective, externally provided liquidity in lieu of internal resources. We test the model’s predictions by employing a new empirical approach that separates cash flow hedging from other hedging instruments. Using detailed, hand-collected data, we find that cash flow hedging reduces the firm’s precautionary demand for cash and allows it to rely more on bank lines of credit. Furthermore, we find a significant positive effect of cash flow hedging on firm value, where prior evidence is mixed.

DOI
10.1093/rof/rft006
Volume
18
Issue
2
Pages
715-748
Language
en
Sources
bibtex:phds-export.bib openalex crossref

Cite