Research on Corporate Hedging Theories: A Critical Review of the Evidence to Date

HEC Montreal Working Paper No. 05-04

ICFAI Journal of Financial Economics IV, 14-40, 2006

56 Pages Posted: 3 Jun 2005 Last revised: 5 Jan 2023

Date Written: June 1, 2005

Abstract

This paper provides a critical review of three common problems facing researchers when implementing tests of corporate hedging theories: (1) how to identify hedgers in the population considered? (2) how to measure corporate hedging and finally, (3) what possible determinants should be considered in the test and, how to measure them? We identify the most popular approaches in the literature to tackle these issues and show that each approach offers its advantages but has also its own limits. More importantly, we show that the different variables used to measure corporate hedging rationales could proxy for more than one argument at a time. Accordingly, results drawn from the tests should be interpreted with caution. Considering the additional arguments developed recently to justify corporate hedging, and the greater availability of data on such activity, we argue that the need for cleaner proxies in the risk management literature is more important than ever.

Keywords: Corporate hedging theories, tests, hedger identification, measures of corporate hedging, determinants of corporate hedging

JEL Classification: G18, G30

Suggested Citation

Triki, Thouraya, Research on Corporate Hedging Theories: A Critical Review of the Evidence to Date (June 1, 2005). HEC Montreal Working Paper No. 05-04, ICFAI Journal of Financial Economics IV, 14-40, 2006, Available at SSRN: https://ssrn.com/abstract=734406 or http://dx.doi.org/10.2139/ssrn.734406

Thouraya Triki (Contact Author)

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

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