Is Corporate Hedging Always Beneficial? A Theoretical and Empirical Analysis

Ahmed, H., Fairchild, R. and Guney, Y. (2020). Is Corporate Hedging Always Beneficial? A Theoretical and Empirical Analysis; European Journal of Finance, Forthcoming

61 Pages Posted: 29 Jun 2020 Last revised: 15 Jul 2020

See all articles by Hany Ahmed

Hany Ahmed

Coventry University

Richard J. Fairchild

University of Bath - School of Management

Yilmaz Guney

Coventry University

Date Written: June 3, 2020

Abstract

This paper investigates, theoretically and empirically, the impact of corporate hedging activities on firm value/performance. In a perfect market, with self-less management, aiming to maximise shareholder wealth, it may be expected that hedging would improve firm performance and add value. Our major contribution in this paper is that we first demonstrate theoretically the conditions under which hedging can increase or decrease firm value. Our theoretic model demonstrates that the ambiguous relationship between hedging and firm value may be due to a subtle combination of economic (managerial self-interest, agency problems/moral hazard, managerial ability, managerial risk aversion) and behavioural factors (overconfidence). Our empirical analysis confirms the ambiguous effect of hedging on firm performance. Empirically, we focus on the use of derivatives in the corporate hedging of three types of financial risk (foreign currency, interest rate and commodity price risks), and examine the effect on value and performance of listed UK corporations during 2005-2017. We demonstrate that the positive or negative effects of the hedging strategies varies significantly across both the financial risk that is hedged and the type of derivatives contracts used in the hedging as well as the time period in consideration.

Keywords: Financial derivatives, Hedging, Performance, Value, UK firms, Risk management

JEL Classification: G30, G32

Suggested Citation

Ahmed, Hany and Fairchild, Richard J. and Guney, Yilmaz, Is Corporate Hedging Always Beneficial? A Theoretical and Empirical Analysis (June 3, 2020). Ahmed, H., Fairchild, R. and Guney, Y. (2020). Is Corporate Hedging Always Beneficial? A Theoretical and Empirical Analysis; European Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3618692

Hany Ahmed

Coventry University ( email )

Priory Street
Coventry, CV1 5FB
United Kingdom

Richard J. Fairchild

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom
01225 323456 (Phone)
01225 323902 (Fax)

Yilmaz Guney (Contact Author)

Coventry University ( email )

Coventry, CV1 5FB
United Kingdom

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