Working Capital Management, the Credit Crisis, and Hedging Strategies: Canadian Evidence

• Activity Number: 112
• Type: Topic Contributed
• Date/Time: Monday, August 4, 2014 : 8:30 AM to 10:20 AM
• Sponsor: Section on Risk Analysis
• Author(s): Robert Kieschnick*+ and Wendy Rotenberg
• Companies: University of Texas at Dallas and University of Toronto
• Keywords: hedging ; derivatives ; risk management ; cash management ; credit crisis ; working capital

Abstract

This study examines a sample of Canadian natural resource firms during the global financial crisis (GFC) of 2007-2008. We observe the influence of firm hedging strategies on working capital management during the crisis and whether the crisis prompted changes in risk management strategies. We find that firms that hedged with derivatives prior to the crisis held less cash than firms that did not, and yet both responded to the credit crisis in very similar ways. This evidence is consistent with firms using either cash or derivatives as alternative hedging strategies. In addition, we find that smaller firms, and more likely financially constrained firms, exhibit a greater tendency to hold excess cash as an alternative to hedging using financial derivatives. We also find that firms facing more foreign exchange risk are more likely to hold excess cash and so we also provide insights into the "trapped cash" controversy.