A Multirisk Approach to Measuring Corporate Hedging and its Determinants

38 Pages Posted: 16 Jul 2008

See all articles by David De Angelis

David De Angelis

Rice University - Jesse H. Jones Graduate School of Business

René Garcia

Université de Montréal - CIREQ - Département de sciences économiques; University of Montreal

Date Written: July, 15 2008

Abstract

The willingness of a firm to hedge its activities is difficult to measure. A single indicator for the use of derivatives or even the notional or fair value of its hedging positions have been shown to entail limitations. In this paper, we introduce a new measure based on the number of risks hedged. From the US EDGAR database, we extract information on the hedging activity in four types of risks: interest rate, currency, commodity and equity. This allows us to better test the theoretical determinants of hedging. In a sample of firms from the S&P 500 over the period 2001 to 2005, we study the hedging behavior by industry and type of risk. While we confirm that leverage, foreign sales and size are the main empirical determinants for corporate hedging, we find significant variations across industries. We also provide empirical support for other determinants such as dividend policy, liquidity, tax credits, growth opportunities and managerial shareholdings. Confirming Adam, Dasgupta and Titman (2007) prediction, we observe that hedging policy heterogeneity is positively related to the competitive structure of the industry.

Keywords: Risk Management, Corporate Hedging, Derivatives, Foreign Currency Hedging, Interest Rate Hedging, Commodity Hedging, Equity Hedging, Financial Distress, Managerial Risk Aversion

JEL Classification: F3, G3, G30, G32

Suggested Citation

De Angelis, David and Garcia, René, A Multirisk Approach to Measuring Corporate Hedging and its Determinants (July, 15 2008). Available at SSRN: https://ssrn.com/abstract=1160472 or http://dx.doi.org/10.2139/ssrn.1160472

David De Angelis (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
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United States

HOME PAGE: http://www.de-angelis.com

René Garcia

Université de Montréal - CIREQ - Département de sciences économiques ( email )

C.P. 6128, succursale Centre-Ville
3150, rue Jean-Brillant, bureau C-6027
Montreal, Quebec H3C 3J7
Canada
514-985-4014 (Phone)

University of Montreal ( email )

United States

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