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

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