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Hedging, Cash Flows, and Firm Value: Evidence of an Indirect Effect

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  • Mohammed Altuntas
  • Andre P. Liebenberg
  • Ethan D. Watson
  • Serhat Yildiz

Abstract

This paper extends and tests the predictions of Froot, Scharfstein, and Stein’s (1993) model of the relation between hedging, cash flows, and firm value. Specifically, we model the impact of derivatives hedging on firm value both directly and also indirectly through its effect on cash flow volatility. We test the model’s predictions using a sample of publicly traded life insurers who report detailed information on both the extent and purpose of derivatives use. We find that both derivatives hedging and cash flow volatility are negatively related to firm value. However, consistent with our theoretical predictions, we find that hedging mitigates the negative value effect of cash flow volatility.

Suggested Citation

  • Mohammed Altuntas & Andre P. Liebenberg & Ethan D. Watson & Serhat Yildiz, 2017. "Hedging, Cash Flows, and Firm Value: Evidence of an Indirect Effect," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 40(1), pages 1-22.
    • Handle: RePEc:wri:journl:v:40:y:2017:i:1:p:1-22
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    Cited by:

    1. Alexandridis, George & Chen, Zhong & Zeng, Yeqin, 2021. "Financial hedging and corporate investment," Journal of Corporate Finance, Elsevier, vol. 67(C).
    2. repec:mth:ijafr8:v:8:y:2018:i:3:p:156-173 is not listed on IDEAS
    3. Amarachi Uzo-Peters & Temitope Laniran & Adeola Adenikinju, 2018. "Brent prices and oil stock behaviors: evidence from Nigerian listed oil stocks," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 4(1), pages 1-15, December.
    4. Baltuttis, Dennik & Töppel, Jannick & Tränkler, Timm & Wiethe, Christian, 2020. "Managing the risks of energy efficiency insurances in a portfolio context: An actuarial diversification approach," International Review of Financial Analysis, Elsevier, vol. 68(C).
    5. Hsin, Chin-Wen & Chang, Feng-Yi & Shiah-Hou, Shin-Rong, 2024. "Performance of financial hedging and earnings management under diverse corporate information quality," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 782-810.
    6. Yao HongXing & Hafiz Muhammad Naveed & Bilal Ahmed Memon & Shoaib Ali & Muhammad Haris & Muhammad Akhtar & Muhammad Mohsin, 2024. "Connectedness between Currency Risk Hedging and Firm Value: A Deep Neural Network-based Evaluation," Computational Economics, Springer;Society for Computational Economics, vol. 63(2), pages 599-638, February.
    7. Sangyong Han & Kwangmin Jung, 2023. "CEO political orientation, risk taking, and firm performance: evidence from the U.S. property-liability insurance industry," Economics of Governance, Springer, vol. 24(1), pages 1-39, March.
    8. Vuong, Giang Thi Huong & Nguyen, Phuc Van & Barky, Walid & Nguyen, Manh Huu, 2024. "Stock return volatility and financial distress: Moderating roles of ownership structure, managerial ability, and financial constraints," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 634-652.

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