Cash Flow Hedging and Liquidity Choices
Forthcoming, Review of Finance
44 Pages Posted: 1 Aug 2009 Last revised: 19 Dec 2012
Date Written: December 19, 2012
Abstract
This paper 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.
Keywords: derivative, hedging, cash, credit line, liquidity
JEL Classification: G30, G31, G32
Suggested Citation: Suggested Citation
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