Abstract

This study examines the effect of optimal risk hedging on corporate future investment and investigates the moderating roles of financial leverage, intensified economic sanctions, and industry volatility. The study is based on the premise that cash-flow volatility and external economic shocks may weaken firms’ financing capacity, increase underinvestment, and delay capital expenditure. Appropriate hedging can reduce financial uncertainty and protect the resources required for future investment. Using a quantitative and empirical research design, the study analyzes panel data from 120 non-financial firms listed on the Tehran Stock Exchange during 2016–2023. Optimal hedging is estimated using a variance-minimization approach. The empirical models are estimated using fixed-effects regression and the generalized method of moments to control for unobservable heterogeneity and potential endogeneity. The findings show that optimal risk hedging has a positive and statistically significant effect on future investment. However, financial leverage weakens this relationship, indicating that debt obligations and financing constraints may reduce the investment benefits of hedging. The moderating effect of intensified sanctions is not statistically significant, suggesting that firm-level hedging cannot fully offset broad macroeconomic and institutional restrictions. In contrast, the positive effect of hedging is stronger in industries characterized by higher volatility. The study contributes to the literature by providing evidence from an emerging market exposed to economic instability, financing constraints, and international restrictions. The findings indicate that risk management can support investment efficiency, particularly when firms operate in volatile industries and maintain sufficient financial flexibility.

Keywords

Optimal risk hedging, future investment, financial leverage, sanctions, industry volatility, corporate risk management.

Introduction

Corporate investment is essential for long-term growth, productivity, and value creation. However, firms make investment decisions under uncertainty. Revenue fluctuations, exchange-rate instability, financing constraints, and external economic shocks may reduce internal funds and increase the cost of external financing. Consequently, firms may postpone profitable projects or invest less than their optimal level.

Risk hedging may alleviate these problems by stabilizing cash flows and improving the predictability of future financial resources. When the hedging ratio is close to its optimal level, firms may preserve their investment capacity and respond more effectively to profitable opportunities. This issue is particularly important in Iran, where firms operate in an environment characterized by macroeconomic instability, financing limitations, and economic sanctions. Accordingly, this study examines whether optimal risk hedging affects future investment among non-financial firms listed on the Tehran Stock Exchange. It also investigates whether financial leverage, intensified sanctions, and industry volatility change the strength of this relationship.

Literature Review

The theoretical framework is based on agency theory, information asymmetry, real-options theory, and Tobin’s Q. Agency theory suggests that uncertainty and weak monitoring may cause managers to postpone investment or allocate resources inefficiently. Hedging may reduce uncertainty and improve the alignment between managerial decisions and shareholders’ interests.

From the information-asymmetry perspective, unstable cash flows increase the risk perceived by lenders and investors and may raise external financing costs. By reducing cash-flow volatility, hedging can improve financial predictability and facilitate access to funds. Real-options theory emphasizes that uncertainty affects the timing of investment. Excessive uncertainty may encourage firms to delay investment, whereas effective risk management can reduce uncertainty and support the implementation of valuable projects. Tobin’s Q further indicates that firms with stronger growth opportunities are expected to invest more, provided that financing constraints do not prevent them from doing so.

Although previous studies have examined the relationship between hedging, financing constraints, and investment, limited evidence exists regarding real investment in Iran. In particular, the moderating effects of sanctions and industry volatility have received insufficient attention. This study addresses these gaps by combining an optimal hedging measure with panel-data methods designed to reduce endogeneity concerns.

Methodology

This quantitative and empirical study examines 120 non-financial firms listed on the Tehran Stock Exchange during 2016–2023. The dependent variable is future corporate investment, measured through investment activity and capital expenditure. The main explanatory variable is optimal risk hedging, estimated using a variance-minimization approach. Financial leverage, intensified sanctions, and industry volatility are considered moderating variables. Profitability, free cash flow, firm size, growth, and Tobin’s Q are included as control variables.

Panel-data methods are used to estimate the relationships. The fixed-effects model controls for unobservable characteristics that remain constant within firms over time. The generalized method of moments is also applied to address possible reverse causality and other endogeneity problems. The statistical analysis includes descriptive statistics, the Jarque–Bera normality test, the Fisher augmented Dickey–Fuller stationarity test, Pearson correlation analysis, and variance inflation factors. The reported results show that the variables are stationary. The highest variance inflation factors for firm size and return on assets are 5.515 and 5.692, respectively, while the strongest reported correlation is between return on assets and leverage, equal to −0.587.



Results and Discussion

The findings show that optimal risk hedging has a positive and statistically significant effect on future investment. This result indicates that firms reducing cash-flow uncertainty are better able to preserve financial resources and undertake future capital expenditure. The finding is consistent with the financing-constraint perspective, according to which stable cash flows reduce the likelihood that profitable investment opportunities will be postponed because of insufficient internal funds. Financial leverage negatively moderates the relationship between hedging and future investment. In highly leveraged firms, the benefits of hedging may be limited by debt-service requirements, restrictive loan covenants, and creditors’ claims. Therefore, the ability of hedging to support investment decreases as financial obligations increase. The moderating effect of intensified sanctions is not statistically significant. This finding suggests that sanctions influence firms through broad economic and institutional channels that cannot be completely neutralized by firm-level hedging. Restrictions on trade, foreign exchange, technology, financing, and international transactions may continue to constrain investment despite the adoption of risk-management strategies.

The positive effect of hedging is stronger in industries with higher volatility. This result demonstrates that the value of hedging depends on the firm’s operating environment. In volatile industries, stabilizing cash flows is more important because uncertainty poses a greater threat to investment planning. The reported model has an R^{2}of 0.463346, an adjusted R^{2}of 0.458831, an F-statistic of 102.6363, and a Durbin–Watson statistic of 1.557215. Return on assets has a positive and significant coefficient of 0.200817 with a probability value of 0.0000. Free cash flow has a negative and significant coefficient of −0.407743 with a probability value of 0.0000. Firm size has a positive and significant effect, whereas growth and Tobin’s Q do not show strong statistical significance in the reported model.

Conclusion

The study concludes that optimal risk hedging significantly supports future corporate investment among non-financial firms listed on the Tehran Stock Exchange. By reducing financial uncertainty and stabilizing cash flows, hedging may improve firms’ ability to finance future projects. Nevertheless, this effect is conditional. High financial leverage weakens the investment benefits of hedging, while industry volatility strengthens them. The insignificant effect of sanctions indicates that firm-level hedging alone cannot overcome extensive macroeconomic and institutional restrictions.

The findings suggest that financial managers should develop hedging strategies according to firms’ financial capacity, debt structure, and industry conditions. Policymakers should improve derivative-market infrastructure and facilitate firms’ access to risk-management instruments. Future research may use alternative measures of hedging, examine different categories of sanctions, and analyze sector-specific investment behavior over longer periods.