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Cash Flow Hedging and Liquidity Choices

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  • David Disatnik
  • Ran Duchin
  • Breno Schmidt

Abstract

This article 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.

Suggested Citation

  • David Disatnik & Ran Duchin & Breno Schmidt, 2014. "Cash Flow Hedging and Liquidity Choices," Review of Finance, European Finance Association, vol. 18(2), pages 715-748.
    • Handle: RePEc:oup:revfin:v:18:y:2014:i:2:p:715-748.
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    File URL: http://hdl.handle.net/10.1093/rof/rft006
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