Is Corporate Hedging Consistent with Value Maximization? An Empirical Analysis

Download or read book Is Corporate Hedging Consistent with Value Maximization? An Empirical Analysis written by John R. Graham and published by . This book was released on 1999 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the derivative holdings of firms facing interest rate and/or currency risk. We net long and short positions to measure the extent of hedging with net notional values. We find that hedging increases with expected financial distress costs, firm size, and investment opportunities. Our evidence is also consistent with firms hedging to increase debt capacity and therefore firm value. We explicitly estimate the convexity in each firm's tax function but do not find evidence that convexity affects corporate hedging. We estimate that the potential increase in value related to tax convexity is much smaller than the tax gain associated with increased debt capacity.