Does the Use of Foreign Currency Derivatives Affect Colombian Firms’ Market Value?

Borradores de Economia, Num. 562, 2009

30 Pages Posted: 6 Jul 2012 Last revised: 9 Sep 2015

See all articles by Carlos León

Carlos León

Banco de la República (Central Bank of Colombia); Tilburg University - Center for Economic Research (CentER)

Jose E Gomez-Gonzalez

Banco de la Republica

Karen Rodriguez

Central Bank of Colombia

Date Written: May 1, 2009

Abstract

Classic financial theory relies on the absolute perfection of capital markets, which results in one of the milestones of theoretical corporate finance: the firm’s value is invariant to the choice of capital structure. As an extension to the aforementioned proposition by Modigliani and Miller (1958), corporate risk management is also futile.

Nevertheless, it is clear that capital markets do not work with absolute perfection. There exist frictions which make risk management decisions essential for firm’s value. Moreover, derivatives’ market vast importance is a good proxy of the relevance of hedging decisions for corporate finance.

There is a remarkable volume of literature which tests the effects of risk management and hedging decisions for the value of the firm, mainly for the US corporate market. However, there is little effort on this subject for markets which work even farther from absolute perfection. This document undertakes such task for the Colombian market. Focused on non-financial firms and the local’s most liquid derivatives market, we find that for a panel of eight large Colombian corporations the growth rate of Tobin´s Q depends significantly on firm´s size and hedging. After controlling for relevant financial variables such as firm´s profitability and leverage, and other variables such as firm´s age, results suggest that an increase in hedging leads to a higher growth in firm´s value.

Keywords: Modigliani-Miller, risk management, hedging, firm value, emerging market

JEL Classification: G32, G30, L25

Suggested Citation

León, Carlos and Gomez-Gonzalez, Jose Eduardo and Rodriguez, Karen, Does the Use of Foreign Currency Derivatives Affect Colombian Firms’ Market Value? (May 1, 2009). Borradores de Economia, Num. 562, 2009, Available at SSRN: https://ssrn.com/abstract=2101218

Carlos León (Contact Author)

Banco de la República (Central Bank of Colombia) ( email )

Bogotá
Colombia

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Jose Eduardo Gomez-Gonzalez

Banco de la Republica ( email )

Carrera 7 #14-78
Bogota
Colombia

Karen Rodriguez

Central Bank of Colombia ( email )

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