Are Firms Successful at Selectively Hedging?

Abstract

This paper analyzes derivative security positions reflecting the corporate risk management policies of 44 companies from the gold mining industry. We document substantial time-series variation in risk management policies. For most firms, little of this variation in hedge ratios is explained by firm-specific variables suggested by theory. Furthermore, we find a tendency for firms to decrease hedging as prices move against them - behavior contrary to that predicted by risk management theory. These results, as well as survey evidence we collect, indicate that corporate risk management policies are often influenced by attempts to time gold market prices, so-called selective hedging. We find some evidence that firms are successful in timing subsequent changes in gold prices. However, we find no evidence that this practice leads to superior operating or financial performance.

Keywords: Risk Management, Financing Policy, Behavioral Corporate Finance

JEL Classification: G10, G30, G32