Classic financial theory relies on the absolute perfection of capital markets, which results in one of the milestones of theoretical corporate finance: the firm’s value is invariant to the choice of capital structure. As an extension to the aforementioned proposition by Modigliani and Miller (1958), corporate risk management is also futile. Nevertheless, it is clear that capital markets do not work with absolute perfection. There exist frictions which make risk management decisions essential for the firm’s value. Moreover, derivatives’ market vast importance is a good proxy of the relevance of hedging decisions for corporate finance. There is a remarkable volume of literature which tests the effects of risk management and hedging decisions for the value of the firm, mainly for the US corporate market. However, there is little effort on this subject for markets which work even farther from absolute perfection. This document undertakes such task for the Colombian market. Focused on non-financial firms and the local’s most liquid derivatives market, we find that for a panel of eight large Colombian corporations, the growth rate of Tobin´s Q depends significantly on firm´s size and hedging. Our results suggests that, after controlling for relevant financial variables such as firm´s profitability and leverage, and other variables such as firm´s age, an increase in hedging leads to a higher growth in the firm´s value.
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Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number
005514.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
John R. Graham & Clifford W. Smith, 1999.
"Tax Incentives to Hedge,"
Journal of Finance,
American Finance Association, vol. 54(6), pages 2241-2262, December.
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Geczy, Christopher & Minton, Bernadette A & Schrand, Catherine, 1997.
" Why Firms Use Currency Derivatives,"
Journal of Finance,
American Finance Association, vol. 52(4), pages 1323-54, September.
[Downloadable!] (restricted)