Determinants of corporate hedging and derivatives: A revisit |
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Authors: | Robert CW Fok Carolyn Carroll Ming C Chiou |
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Institution: | aDepartment of Finance, National Chung Cheng University, Chia-Yi, Taiwan, Republic of China;bDepartment of Finance, University of Alabama, Tuscaloosa, Alabama, USA;cInternational Commercial Bank of China, Chia-Yi, Taiwan, Republic of China |
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Abstract: | Although the primary purpose of hedging is to reduce earnings volatility, corporate hedging may also increase firm value. Using publicly-available data, we found that hedging reduces the probability of financial distress, reduces the agency costs of debt, and reduces some agency costs of equity. However, we found no support for the hypothesis that hedging increases firm value by reducing expected tax liability. In addition, we suggest that corporate ownership structure may affect the desirability of hedging. We also found that large firms have a stronger tendency to hedge, firms with a larger percentage of value derived from growth opportunities are more likely to hedge, and convertible debt serves as a substitute for corporate hedging. With a dummy variable for multinational corporations as a proxy for operational hedging, we found that operational hedging and derivative hedging are complements rather than substitutes. |
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Keywords: | Corporate hedging Derivatives Risk management |
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