Is Corporate Hedging Consistent with Value Maximization? An Empirical Analysis

47 Pages Posted: 26 Jul 1999

See all articles by John R. Graham

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Daniel A. Rogers

Portland State University - School of Business Administration

Date Written: June 25, 1999

Abstract

We study the derivative holdings of firms facing interest rate and/or currency risk. We net long and short positions to measure the extent of hedging with net notional values. We find that hedging increases with expected financial distress costs, firm size, and investment opportunities. Our evidence is also consistent with firms hedging to increase debt capacity and therefore firm value. We explicitly estimate the convexity in each firm's tax function but do not find evidence that convexity affects corporate hedging. We estimate that the potential increase in value related to tax convexity is much smaller than the tax gain associated with increased debt capacity.

JEL Classification: G32, G39

Suggested Citation

Graham, John Robert and Rogers, Daniel A., Is Corporate Hedging Consistent with Value Maximization? An Empirical Analysis (June 25, 1999). Available at SSRN: https://ssrn.com/abstract=170348 or http://dx.doi.org/10.2139/ssrn.170348

John Robert Graham

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Daniel A. Rogers (Contact Author)

Portland State University - School of Business Administration ( email )

P.O. Box 751
Portland, OR 97207-0751
United States
503-725-3790 (Phone)
503-725-5850 (Fax)

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