Does corporate hedging affect firm valuation? Evidence from the IPO market

Zheng Qiao, Chongwu Xia and Lei Zhang

Journal of Futures Markets, 2020, vol. 40, issue 6, 895-927

Abstract: Focusing on the IPO market, we examine the influence of corporate hedging on firm valuation. Consistent with the argument that hedging reduces information asymmetry, we find that hedging IPO firms are associated with lower price revisions and underwriting fees. More important, hedging reduces IPO underpricing, especially for informationally opaque firms. This provides strong evidence that corporate hedging increases firm valuation. We also show that corporate hedging lowers aftermarket idiosyncratic volatility, enhances aftermarket liquidity, and improves the long‐term performance of IPO firms. We use both an instrumental variable approach and a regulation change on derivatives supply to address endogeneity concerns.

Date: 2020
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