Foreign Currency Hedging and Firm Value: A Dynamic Panel Approach
36 Pages Posted: 17 Nov 2008 Last revised: 28 Jan 2009
Date Written: October 20, 2008
I reinvestigate the effect of foreign currency hedging on firm value. Consistent with prior research, my initial analysis suggests foreign currency hedging is associated with an increase in firm value. However, this analysis ignores the possibility that firm value may affect foreign currency hedging. I find foreign currency hedging depends on past amounts of firm value, and after controlling for this feedback effect, foreign currency hedging no longer affects firm value. This paper highlights the importance of controlling for the possibility of feedback from past amounts of firm value to the current amount of hedging when examining the effect of hedging on firm value.
Keywords: Corporate hedging, Derivatives, Endogeneity, Tobin's Q
JEL Classification: F30, G32
Suggested Citation: Suggested Citation