Corporate financial hedging and firm value: a meta-analysis

Abstract

This paper presents a quantitative review of the empirical literature analyzing the firm value effects of corporate financial hedging. Using meta-regression analysis to accumulate a hand-collected data set of 1016 estimates for the hedging premium reported in 71 previous studies, we find that the reported firm value effects of hedging are systematically higher for foreign exchange hedgers as compared to interest rate and commodity price hedgers, for studies published in higher ranked journals, and for models estimated with firm fixed effects and controls for endogeneity. Our results also suggest that hedging premiums increase significantly when a study also considers operational hedging strategies in addition to financial hedging. Moreover, we detect geographical differences providing evidence for a larger hedging effect in less developed financial markets and countries with higher tax rates. Taking together the existing literature and assuming a 'best practice' study design, we predict an overall hedging premium of 1.8% for foreign currency hedgers and a firm value discount of -0.8% (-0.6%) for interest rate (commodity price) hedgers.

The real effect of foreign exchange hedging on corporate innovation

“…Consistently, Dadalt et al (2002) find that the informational role of hedging is primarily driven by currency derivatives and marginally extends to interest rate derivatives. Geyer-Klingeberg et al (2021) show that the hedging premium for FX hedging is positive while that for interest rate hedging/commodity hedging is negative. We document that firms employing FX hedging are associated with more innovation, which supports the view that FX derivatives are generally used for hedging purposes.…”

Optimal hedging in the presence of internal flexibility

“…In short, empirical evidence regarding the value of risk management depends on samples and econometric techniques (Geyer-Klingeberg et al, 2021). To achieve consistency, economic models have been adopted because functions can be specified and parameters are self-adaptive.…”

“…However, empirical research on the effects of risk management has produced mixed results. Geyer-Klingeberg et al (2021) noted that the estimated value of financial hedging is dependent on the level of control over operational strategy, the business environment, and other firm-specific factors.…”

Dark Triad Personality Traits and Selective Hedging

“…Hedging affects firm values by reducing the probability of financial distress and expected bankruptcy costs, underinvestment risk, expected tax liabilities, agency costs, and information asymmetries (see, e.g., Campello et al, 2011;Carter et al, 2006;Froot et al, 1993). Estimating the increase in firm value, Geyer-Klingeberg et al (2020) find that foreign currency hedgers realize a firm value hedging premium of 1.8%. Firms that have access to newly created hedging opportunities also experience up to a 40% decline in the variance of their stock returns (Biguri et al, 2018).…”