Cash Flow, Investment and Derivative Use: An Empirical Analysis of New Zealand Listed Companies

Abstract

Using a sample of non-financial New Zealand companies we examine whether firms that use financial derivative instruments are more financially constrained compared to those that do not hedge. We find a significantly positive relationship between derivative usage and financial leverage and a significantly negative relationship between derivative usage and liquidity suggesting that these firms may be financially constrained. Consistent with this observation, we also find that firms that use derivatives exhibit significantly higher sensitivity of investments to internal cash flows compared to firms that do not use derivatives, suggesting that investment for these firms are reliant on availability of internally generated funds. Finally, we find that among the firms that use derivatives, the sensitivity of investment to cash flows is a decreasing function of firm size suggesting that regardless of the derivative use status, larger firms have better access to external capital compared to small firms.