Firm Performance and Hedging Business Risk

29 Pages Posted: 11 Mar 2019 Last revised: 25 Sep 2019

See all articles by Gurupdesh S. Pandher

Gurupdesh S. Pandher

University of Windsor, Odette School of Business

Jerry Y. Sun

University of Windsor - Odette School of Business

Russell R. Currie

Thompson Rivers University - School of Business and Economics

Date Written: May 1, 2018

Abstract

This research focuses on the ultimate impact of hedging effectiveness on firm performance. Successful risk management in firms should lead to a lesser occurrence of lower business outcomes than higher outcomes (e.g., positive skewness in quarterly earnings per share). We empirically estimate the hedging profile of 5,586 non-financial firms (spanning 25 industries) from their quarterly earnings per shares (EPS) and relate it to Tobin’s Q, excess stock returns, ROE and ROA. The estimation controls for important firm characteristics (e.g., median EPS, firm size, leverage, market risk, earnings management, firm-industry fixed effects) and endogeneity. The resulting coefficient for EPS skewness – after controlling for median EPS and other firm characteristics – identifies the impact of the firm's hedging profile on firm performance. We find a strong positive relation between firm performance and the hedging profile as Tobin’s Q, ROE and ROA rise by 0.035, 2.6% and 1.4%, respectively, when EPS skewness rises by one (14% of firms). Study results provide further support for shareholder maximization and signaling theories of hedging.


Keywords: risk management, firm valuation, profitability, hedging profile, Tobin’s Q, excess stock returns, ROE, shareholder maximization theory, signaling theory

JEL Classification: G32, L1, M2, M4, C23

Suggested Citation

Pandher, Gurupdesh S. and Sun, Jerry Y. and Currie, Russell R., Firm Performance and Hedging Business Risk (May 1, 2018). Available at SSRN: https://ssrn.com/abstract=3337795 or http://dx.doi.org/10.2139/ssrn.3337795

Gurupdesh S. Pandher (Contact Author)

University of Windsor, Odette School of Business ( email )

401 Sunset Avenue
Windsor, Ontario N9B 3P4
Canada
519-253-3000 ext 3091 (Phone)

HOME PAGE: http://www1.uwindsor.ca/odette/gurupdesh-pandher

Jerry Y. Sun

University of Windsor - Odette School of Business ( email )

401 Sunset
Windsor N9B 3P4, Ontario
Canada
519-2533000-3122 (Phone)

Russell R. Currie

Thompson Rivers University - School of Business and Economics ( email )

900 McGill Road
Kamloops, British Columbia V2C 0C8
Canada
828-5217 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
77
Abstract Views
356
rank
323,563
PlumX Metrics