Cash Flow Hedging and Liquidity Choices

Forthcoming, Review of Finance

44 Pages Posted: 1 Aug 2009 Last revised: 19 Dec 2012

See all articles by David Disatnik

David Disatnik

Tel Aviv University - Faculty of Management ; Tel Aviv University - Faculty of Management

Ran Duchin

Boston College - Carroll School of Management

Breno Schmidt

Emory University - Goizueta Business School

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

Disatnik, David J. and Disatnik, David J. and Duchin, Ran and Schmidt, Breno, Cash Flow Hedging and Liquidity Choices (December 19, 2012). Forthcoming, Review of Finance, Available at SSRN: https://ssrn.com/abstract=1442166 or http://dx.doi.org/10.2139/ssrn.1442166

David J. Disatnik

Tel Aviv University - Faculty of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel

Tel Aviv University - Faculty of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel

Ran Duchin (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Breno Schmidt

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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