Does the hedge pay? Assessing natural hedging’s role in firm valuation under varying macroeconomic conditions

Anureet Saharan () and Madhumathi Rajendran
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Anureet Saharan: Indian Institute of Technology Madras
Madhumathi Rajendran: Indian Institute of Technology Madras

Future Business Journal, 2024, vol. 10, issue 1, 1-18

Abstract: Abstract This study aims to assess the influence of natural hedging on firm value, incorporating the mediating role of financial derivatives and the moderating impact of macroeconomic variables. Employing partial least square structural equation modeling on data spanning 21,169 firm years (3050 firms) from 2015 to 2022, our analysis discerns significant effects. Natural hedging notably impacts firm value, while the impact on financial derivatives is contingent on the nature of the natural hedging strategy. High transactional involvement renders the relationship complementary, while a strategy with fewer and flexible transactions signifies a substitutive relation. An inflexible, cash flow-specific natural hedging strategy, such as foreign debt, can be mutually exclusive with financial derivatives when the cash inflow in foreign currency matches perfectly with interest payments. However, in subsequent periods, when the nature of cash inflows changes, this relationship can become complementary, allowing for the integration of financial derivatives to fine-tune and enhance the overall hedging strategy. Macroeconomic fluctuations do not moderate the relationship between natural hedging and firm value within the same period. Instead, the impact is moderated by GDP growth rates in subsequent periods.

Keywords: Risk management; Firm value; Hedging premium; Structural equation modeling; PLS-SEM (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1186/s43093-024-00407-4

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