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The price gold shareholders place on market risks

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  • Les Coleman

Abstract

This study introduces two gold-mining companies with almost identical assets but opposite hedge policies and demonstrates that shareholders do not place any permanent value on hedging. The unhedged gold miner has a market value premium above its hedged counterpart that changes in response to gold's price; but the alternative risk strategies do not bring any difference in returns to shareholders and financial measures of firm risk. These conclusions challenge previous analyses and the standard finance assumption that securities with higher expected risks bring higher returns.

Suggested Citation

  • Les Coleman, 2010. "The price gold shareholders place on market risks," Applied Financial Economics, Taylor & Francis Journals, vol. 20(10), pages 795-802.
    • Handle: RePEc:taf:apfiec:v:20:y:2010:i:10:p:795-802
    DOI: 10.1080/09603101003636196
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    References listed on IDEAS

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    1. Mitchell A. Petersen & S. Ramu Thiagarajan, 2000. "Risk Measurement and Hedging: With and Without Derivatives," Financial Management, Financial Management Association, vol. 29(4), Winter.
    2. repec:bla:jfinan:v:53:y:1998:i:3:p:1015-1052 is not listed on IDEAS
    3. David A. Carter & Daniel A. Rogers & Betty J. Simkins, 2006. "Does Hedging Affect Firm Value? Evidence from the US Airline Industry," Financial Management, Financial Management Association International, vol. 35(1), pages 53-86, March.
    4. Robert Faff & Howard Chan, 1998. "A multifactor model of gold industry stock returns: evidence from the Australian equity market," Applied Financial Economics, Taylor & Francis Journals, vol. 8(1), pages 21-28.
    5. Hentschel, Ludger & Kothari, S. P., 2001. "Are Corporations Reducing or Taking Risks with Derivatives?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(1), pages 93-118, March.
    6. Adam, Tim R. & Fernando, Chitru S., 2006. "Hedging, speculation, and shareholder value," Journal of Financial Economics, Elsevier, vol. 81(2), pages 283-309, August.
    7. Blose, Laurence E. & Shieh, Joseph C. P., 1995. "The impact of gold price on the value of gold mining stock," Review of Financial Economics, Elsevier, vol. 4(2), pages 125-139.
    8. Gregory W. Brown & Peter R. Crabb & David Haushalter, 2006. "Are Firms Successful at Selective Hedging?," The Journal of Business, University of Chicago Press, vol. 79(6), pages 2925-2950, November.
    9. Tamir Levy & Joseph Yagil, 2005. "The informational content of article publication: the case of twin stocks," Applied Financial Economics, Taylor & Francis Journals, vol. 15(17), pages 1199-1202.
    10. Tufano, Peter, 1996. "Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry," Journal of Finance, American Finance Association, vol. 51(4), pages 1097-1137, September.
    11. Guay, Wayne R., 1999. "The impact of derivatives on firm risk: An empirical examination of new derivative users1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 319-351, January.
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    Cited by:

    1. Dirk G Baur, 2012. "An Empirical Analysis of Australian Gold Mining Firms," Working Paper Series 171, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    2. Baur, Dirk G., 2014. "Gold mining companies and the price of gold," Review of Financial Economics, Elsevier, vol. 23(4), pages 174-181.
    3. Dirk G. Baur, 2014. "Gold mining companies and the price of gold," Review of Financial Economics, John Wiley & Sons, vol. 23(4), pages 174-181, November.

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