The effects of financial and operational hedging on company value: The case of Malaysian multinationals

Azadeh Hadian and Cahit Adaoglu

Journal of Asian Economics, 2020, vol. 70, issue C

Abstract: This study examines the value effects of financial and operational hedging in a managed floating exchange rate regime with strict limitations on the trading of Malaysian Ringgit for a sample of 109 Malaysian multinationals from 2004–2018. Using Tobin’s Q as a proxy for company value, the two-step system GMM estimation results show that, on average, derivatives hedging creates a value premium range of 7.88–8.21 % in the short-run, and 18.81–19.80 % in the long-run. This value premium emerged both after controlling for non-operational foreign exchange profits (losses), and its two components: transaction and translation profits (losses). In contrast, foreign debt hedging, on average, creates a value discount range of 8.19–8.54 % in the short-run and 12.70–13.12 % in the long-run. No evidence shows value effect for operational hedging though. The positive value effect of derivatives hedging should motivate managers of Malaysian multinationals to hedge foreign currency exposure through derivatives and encourage policymakers to take steps in developing derivatives market and products. However, the negative value effect of foreign debt hedging indicates that it destroys value. This negative effect might reflect two potential causes; higher company risk due to FC debt financing, and improper hedging practices including high costs of hedging in the underdeveloped derivatives market. These potential causes need further empirical evaluations.

Keywords: Financial hedging; Operational hedging; Company value; Foreign currency derivatives; Foreign currency debt; Malaysia (search for similar items in EconPapers)
JEL-codes: F30 G32 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1049007820301123
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:asieco:v:70:y:2020:i:c:s1049007820301123

DOI: 10.1016/j.asieco.2020.101232

Access Statistics for this article

Journal of Asian Economics is currently edited by C. Wiemer

More articles in Journal of Asian Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().