Post by Sapphire Capital on Feb 17, 2009 20:35:21 GMT 4
The Effect of Foreign Currency Hedging on External Financing
Shane Magee
Macquarie University - Applied Finance Centre
January 12, 2009
Abstract:
Existing theory offers two divergent views on the effect of hedging on external financing. One view is that hedging allows a firm to reduce its reliance on external finance when capital market imperfections make external finance more costly than internally generated funds. A contrasting view is that by reducing information asymmetries and/or volatility, hedging reduces external financing costs and hence motivates firms to increase their reliance on external financing. In this paper, I provide empirical evidence on the effect of foreign currency hedging on external financing. My results suggest foreign currency hedgers rely more on external financing than nonhedgers. In addition, although financially constrained hedgers rely less on external financing than financially unconstrained hedgers, financially constrained hedgers rely more on external financing than financially constrained nonhedgers. Further, I find that the difference in external financing between hedgers and nonhedgers is primarily in debt financing, suggesting that the decision to hedge foreign currency risk leads to greater debt capacity.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1328266_code592892.pdf?abstractid=1326189&mirid=2
Shane Magee
Macquarie University - Applied Finance Centre
January 12, 2009
Abstract:
Existing theory offers two divergent views on the effect of hedging on external financing. One view is that hedging allows a firm to reduce its reliance on external finance when capital market imperfections make external finance more costly than internally generated funds. A contrasting view is that by reducing information asymmetries and/or volatility, hedging reduces external financing costs and hence motivates firms to increase their reliance on external financing. In this paper, I provide empirical evidence on the effect of foreign currency hedging on external financing. My results suggest foreign currency hedgers rely more on external financing than nonhedgers. In addition, although financially constrained hedgers rely less on external financing than financially unconstrained hedgers, financially constrained hedgers rely more on external financing than financially constrained nonhedgers. Further, I find that the difference in external financing between hedgers and nonhedgers is primarily in debt financing, suggesting that the decision to hedge foreign currency risk leads to greater debt capacity.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1328266_code592892.pdf?abstractid=1326189&mirid=2