Do Firms Use Derivatives to Reduce their Dependence on External Capital Markets? |
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Authors: | Tim R Adam |
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Institution: | (1) Department of Finance, Hong Kong University of Science & Technology, Clear Water Bay, Kowloon, Hong Kong |
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Abstract: | This study investigates if the use of derivatives by corporations is likelyto affect their financing strategies. I find a strong positive relationbetween the minimum revenue guaranteed by hedging and investmentexpenditures. This result implies that hedging increases the likelihood thatinvestments can be financed internally. I also find that firms tend tofinance their investment expenditures externally rather than internally. Ifexternal capital is more costly than internal capital it would clearly be ina firm's interest to reduce its dependence on external capital. Consistentwith this result, I find that the median firm that does not hedge finances100% of its investment expenditures externally, while the median firm thathedges finances only 86% of investments externally. |
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Keywords: | Financial risk management hedging investments financing policy financial constraints gold mining industry |
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