The Effects of Financial and Operational Hedging on Company Value: The Case of Malaysian Multinationals

66 Pages Posted: 9 Jan 2021

See all articles by Azadeh Hadian

Azadeh Hadian

Eastern Mediterranean University - Department of Banking and Finance

Cahit Adaoglu

Eastern Mediterranean University - Department of Banking and Finance

Date Written: July 13, 2020

Abstract

This study examines the value effects of financial and operational hedging in a managed floating exchange rate regime with strict limitations on the trading of Malaysian Ringgit for a sample of 109 Malaysian multinationals from 2004 to 2018. Using Tobin’s Q as a proxy for company value, the two-step system GMM estimation results show that, on average, derivatives hedging creates a value premium range of 7.88-8.21% in the short-run, and 18.81-19.80% in the long-run. This value premium emerged both after controlling for non-operational foreign exchange profits (losses), and its two components: transaction and translation profits (losses). In contrast, foreign debt hedging, on average, creates a value discount range of 8.19-8.54% in the short-run and 12.70-13.12% in the long-run. No evidence shows value effect for operational hedging though. The positive value effect of derivatives hedging should motivate managers of Malaysian multinationals to hedge foreign currency exposure through derivatives and encourage policymakers to take steps in developing derivatives market and products. However, the negative value effect of foreign debt hedging indicates that it destroys value. This negative effect might reflect two potential causes; higher company risk due to FC debt financing, and improper hedging practices including high costs of hedging in the underdeveloped derivatives market. These potential causes need further empirical evaluations.

Keywords: Financial Hedging, Operational Hedging, Company Value, Foreign Currency Derivatives, Foreign Currency Debt, Malaysia

JEL Classification: F30, G32

Suggested Citation

Hadian, Azadeh and Adaoglu, Cahit, The Effects of Financial and Operational Hedging on Company Value: The Case of Malaysian Multinationals (July 13, 2020). Journal of Asian Economics, Vol. 70, 2020, Available at SSRN: https://ssrn.com/abstract=3724984 or http://dx.doi.org/10.2139/ssrn.3724984

Azadeh Hadian (Contact Author)

Eastern Mediterranean University - Department of Banking and Finance ( email )

Gazimagusa, via Mersin-10
Turkey

Cahit Adaoglu

Eastern Mediterranean University - Department of Banking and Finance ( email )

Famagusta North Cyprus, via Mersin-10
Turkey
+903926302116 (Phone)

HOME PAGE: http://www.emu.edu.tr

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