In this paper, the relation between hedging and leverage is studied using Indian firm data in the period 2002-2013 as the growth of Indian derivative markets has been rapid during this period following the economic liberalization. The analysis is carried out using a two-stage instrumental variable regression framework. The results show that hedging with derivatives allows firms to increase their debt ratio which results in a higher level of leverage leading to higher firm value from tax shields and are consistent with prior literature.
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