How Does Information Asymmetry Affect Corporate Hedging?

54 Pages Posted: 26 Apr 2021 Last revised: 12 May 2021

See all articles by Praveen Kumar

Praveen Kumar

University of Houston - Department of Finance

Kit Pong Wong

University of Hong Kong

Shijie Yang

The Chinese University of Hong Kong, Shenzhen

Margaret Rui Zhu

The Chinese University of Hong Kong (CUHK)

Hong Zou

The University of Hong Kong - Faculty of Business and Economics

Date Written: May 18, 2020

Abstract

We revisit the unsettled question of the effects of information asymmetry on corporate hedging by testing three relevant theories. Exploiting mergers or closures of brokerage firms as plausibly exogenous information asymmetry events, we find that treatment firms significantly reduce derivative-based hedging, compared with matched control firms. Lower hedging is concentrated in firms that are ex ante subject to (1) lower collateral, more financial constraints and better growth opportunities or (2) lower collateral and a lower-quality CEO. Treatment firms that have a high-quality CEO and are not subject to collateral constraints increase hedging after the shock, consistent with the hypothesis that hedging signals superior managerial quality. Overall, our findings highlight the complex relationship between information asymmetry and corporate hedging.

Keywords: Information asymmetry, collateral, risk management, hedging, analysts

JEL Classification: G30, G32, K22

Suggested Citation

Kumar, Praveen and Wong, Keith Kit Pong and Yang, Shijie and Zhu, Margaret Rui and Zou, Hong, How Does Information Asymmetry Affect Corporate Hedging? (May 18, 2020). Available at SSRN: https://ssrn.com/abstract=3833733 or http://dx.doi.org/10.2139/ssrn.3833733

Praveen Kumar (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States
713-743-4770 (Phone)
713-743-4789 (Fax)

Keith Kit Pong Wong

University of Hong Kong ( email )

Faculty of Business and Economics
University of Hong Kong
Hong Kong, Nil Nil
Hong Kong
(852) 2859-1044 (Phone)
(852) 2548-1152 (Fax)

Shijie Yang

The Chinese University of Hong Kong, Shenzhen ( email )

Zhiren 606
2001 Longxiang Road, Longgang District
Shenzhen, Guangdong 518172
China

Margaret Rui Zhu

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong
+852 3943 3216 (Phone)

Hong Zou

The University of Hong Kong - Faculty of Business and Economics ( email )

China

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