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Corporate Hedging and Shareholder Value

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Author Info
Aretz, Kevin
Bartram, Söhnke M.

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Abstract

According to financial theory, corporate hedging can increase shareholder value in the presence of capital market imperfections such as direct and indirect costs of financial distress, costly external financing, and taxes. This paper presents a comprehensive review of the extensive existing empirical literature that has tested these theories, documenting overall mixed empirical support for rationales of hedging with derivatives at the firm level. While various empirical challenges and limitations advise some caution with regard to the interpretation of the existing evidence, the results are, however, consistent with derivatives use being just one part of a broader financial strategy that considers the type and level of financial risks, the availability of risk-management tools, and the operating environment of the firm. In particular, recent evidence suggests that derivatives use is related to debt levels and maturity, dividend policy, holdings of liquid assets, and the degree of operating hedging. Moreover, corporations do not just use financial derivatives, but rely heavily on pass-through, operational hedging, and foreign currency debt to manage financial risk.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14088.

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Date of creation: 01 Feb 2009
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Handle: RePEc:pra:mprapa:14088

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Related research
Keywords: Corporate finance; risk management; exposure; foreign exchange rates; derivatives;

Find related papers by JEL classification:
F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
F3 - International Economics - - International Finance
G3 - Financial Economics - - Corporate Finance and Governance

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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.:
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Cited by:
(explanations, 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.)

  1. José Eduardo Gómez González & Carlos Eduardo León Rincón & Karen Julieth Leiton Rodríguez, 2009. "Does the Use of Foreign Currency Derivatives Affect Colombian Firms’ Market Value?," BORRADORES DE ECONOMIA 005514, BANCO DE LA REPÚBLICA. [Downloadable!]
    Other versions:
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