Hedging with Derivatives and Firm Value

Mariana Vila Nova (), António Melo Cerqueira () and Elísio Brandão ()
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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

FEP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

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.

Keywords: Hedging; Derivatives; Firm Value; Risk Management (search for similar items in EconPapers)
JEL-codes: F31 G32 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2015-12
New Economics Papers: this item is included in nep-cfn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:por:fepwps:568

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