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Hedging with Derivatives and Firm Value

Author

Listed:
  • Mariana Vila Nova

    (FEP-UP - School os Economics and Management)

  • António Melo Cerqueira

    (FEP-UP - School os Economics and Management)

  • Elísio Brandão

    (FEP-UP - School os Economics and Management)

Abstract

This study examines the impacts of risk management strategies with derivatives on firm’s market value using a sample of non-financial firms listed in the FTSE-350 share index at the London Stock Exchange between 2005 and 2013. We focus on the derivatives use to hedge both the foreign exchange risk and the interest rate risk. To avoid, as far as possible, the endogeneity among variables and consequently strengthen the tests, it is employed an instrumental variables approach in addition to the OLS with time and industry fixed effects. The results reveal a positive effect of foreign currency derivatives and interest rate derivatives on firm’s market value, which indicates that investors, at least under the conditions described in the study, appreciate these risk management practices and reward them with higher market values. However, if we attempt to the derivative contract employed – forward, option, swap - their impacts on firm value differ. For instance, while swaps use to hedge the interest rate risk or the forward contracts to hedge the foreign exchange rate risk have positive and significant effects on value, this effect is not clear when we employ an option contract.

Suggested Citation

  • Mariana Vila Nova & António Melo Cerqueira & Elísio Brandão, 2015. "Hedging with Derivatives and Firm Value," FEP Working Papers 568, Universidade do Porto, Faculdade de Economia do Porto.
    • Handle: RePEc:por:fepwps:568
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    File URL: http://www.fep.up.pt/investigacao/workingpapers/wp568.pdf
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    References listed on IDEAS

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    1. Yanbo Jin & Philippe Jorion, 2006. "Firm Value and Hedging: Evidence from U.S. Oil and Gas Producers," Journal of Finance, American Finance Association, vol. 61(2), pages 893-919, April.
    2. Francisco Pérez-González & Hayong Yun, 2013. "Risk Management and Firm Value: Evidence from Weather Derivatives," Journal of Finance, American Finance Association, vol. 68(5), pages 2143-2176, October.
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    5. Allayannis, George & Weston, James P, 2001. "The Use of Foreign Currency Derivatives and Firm Market Value," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 243-276.
    6. Lel, Ugur, 2012. "Currency hedging and corporate governance: A cross-country analysis," Journal of Corporate Finance, Elsevier, vol. 18(2), pages 221-237.
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    Cited by:

    1. Bessler, Wolfgang & Conlon, Thomas & Huan, Xing, 2019. "Does corporate hedging enhance shareholder value? A meta-analysis," International Review of Financial Analysis, Elsevier, vol. 61(C), pages 222-232.
    2. Affaf Asghar Butt & Main Sajid Nazir & Hamera Arshad & Aamer Shahzad, 2018. "Corporate Derivatives and Ownership Concentration: Empirical Evidence of Non-Financial Firms Listed on Pakistan Stock Exchange," JRFM, MDPI, vol. 11(3), pages 1-15, June.
    3. Diogo Batista da SIlva & António Cerqueira & Elísio Brandão, 2017. "Earnings Management Dynamics in Portuguese Listed Firms," FEP Working Papers 587, Universidade do Porto, Faculdade de Economia do Porto.

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    More about this item

    Keywords

    Hedging; Derivatives; Firm Value; Risk Management;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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