Hedging maturity: causes and effects on corporate investment

• Grant number: 22/15342-3
• Support Opportunities: Scholarships abroad - Research
• Start date: September 18, 2023
• End date: April 17, 2024
• Field of knowledge: Applied Social Sciences - Administration - Business Administration
• Principal Investigator: Rafael Felipe Schiozer
• Grantee: Rafael Felipe Schiozer
• Host Investigator: Emanuele Bajo
• Host Institution: Escola de Administração de Empresas de São Paulo (EAESP). Fundação Getúlio Vargas (FGV). São Paulo , SP, Brazil
• Institution abroad: Università di Bologna, Italy

Abstract

Hedging maturity, i.e., how far out in time hedging activities stretch, is an important yet under-theorized aspect of corporate risk management. In this article, we plan to analyse firms' hedging maturity decision and carry out a comprehensive empirical analysis. We develop three hypotheses to explain hedging maturity. The collateral hypothesis states that longer maturities are predicated on the availability of internal resources that serve as collateral in a hedging transaction. The flexibility hypothesis holds that the ability to change operations or investment strategies at low cost is conducive to shorter maturities. The matching hypothesis argues that firms match their hedging maturity with the maturity of their debt and investment portfolios. Using hand-collected data on derivative positions in the oil and gas industry, we plan to test all three hypotheses. The insights (and the results) obtained in this first project may generate extensions that will use, in part or in total, the database generated by this first project. Namely, one of these extensions would be examining whether a longer hedging maturity allows firms to maintain their optimal investment levels during downturns. A second extension would be investigating whether firms liquidate long-term derivatives before their contractual maturity to avoid financial distress and/or restore their investment capacity during industry downturns. (AU)