Does Hedging Financing Ensure Shareholder Value: The Case of Investment Decision

Abstract

This paper highlights the conflicting relationship between financial governance mechanisms and financing. The choice of external financing tends to reduce manager’s flexibility because of the controls and pressures exerted by the lenders. Taking the case of investment projects financing, we will demonstrate that external financing forced managers to a rigorous selection of their projects and regular repayments and planned in advance. On the other hand, the usage of financial market financing allows them to avoid high costs of external financing by contracting derivatives guaranteeing cash regard less of the project’s quality. This financial independence may weaken the control mechanisms and encourage managers to favor their private interests by investing in projects without added value for shareholders.