Corporate Hedging and Shareholder Value

Kevin Aretz and Söhnke M. Bartram

MPRA Paper from University Library of Munich, Germany

Abstract: According to financial theory, corporate hedging can increase shareholder value in the presence of capital market imperfections such as direct and indirect costs of financial distress, costly external financing, and taxes. This paper presents a comprehensive review of the extensive existing empirical literature that has tested these theories, documenting overall mixed empirical support for rationales of hedging with derivatives at the firm level. While various empirical challenges and limitations advise some caution with regard to the interpretation of the existing evidence, the results are, however, consistent with derivatives use being just one part of a broader financial strategy that considers the type and level of financial risks, the availability of risk-management tools, and the operating environment of the firm. In particular, recent evidence suggests that derivatives use is related to debt levels and maturity, dividend policy, holdings of liquid assets, and the degree of operating hedging. Moreover, corporations do not just use financial derivatives, but rely heavily on pass-through, operational hedging, and foreign currency debt to manage financial risk.

Keywords: Corporate finance; risk management; exposure; foreign exchange rates; derivatives (search for similar items in EconPapers)
JEL-codes: F4 F3 G3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-rmg
Date: Written
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