Corporate Hedging and Risk Management Theory: Evidence from Polish Listed Companies

Abstract

Purpose – This paper aims to provide a comprehensive empirical assessment of major contemporary corporate hedging theories, i.e. financial theory, agency theory, stakeholder theory and new institutional economics.

Design/methodology/approach – Hypotheses regarding the determinants of hedging are tested on a sample of 150 companies listed on the Warsaw Stock Exchange. The panel covers a period of five years (2001-2005). Unlike in previous research the tests are organised around theories rather than individual hypotheses. In addition to classic tests, CART analysis is used to verify hypotheses.

Findings – The results show low empirical verification of all theories considered. However, the results support some single hypotheses. Tests identified currency exposure, market-to-book value, IT and service sectors and size as being determinants of hedging.

Research limitations/implications – The results provide evidence for the low usefulness of contemporary theories. New models are needed to explain hedging behaviour more accurately.

Practical implications – The results identify characteristics shared by firms that use hedging. Companies considering implementing hedging can check whether they share these characteristics.

Originality/value – This paper adds to risk management research by providing strong empirical evidence of theory verification status. It can serve as a base for future conceptual research.

Keywords: Risk management, Hedging, Derivative markets, Poland

JEL Classification: G30