Rather complements than substitutes: Firm value effects of capital structure and financial hedging decisions

Abstract

The aim of this study is to analyze the interaction between capital structure decisions and risk management decisions as well as the channels through which they add value to firms. Competing theories are considered in an integrated path model, which we test by means of meta-analytic structural equation modelling (MASEM). This meta-analysis is based on 6,312 reported results, which are manually collected from 411 empirical studies. We find that capital structure mediates the relation between corporate financial hedging and firm value. In this regard, active risk management positively affects leverage by providing greater debt capacities. Furthermore, leverage has a negative impact on firm value. Hence, capital structure and financial hedging decisions appear rather as complements instead of substitutes. This implies that managers should leave additional debt capacities unused and instead use additional internal funds arising from active risk management to carry out profitable projects and research and development activities. Overall, corporate hedging is found to especially add value to a firm by lowering bankruptcy risks and underinvestment risks.

The underlying mechanisms of the relationships between corporate financial policies and firm value: flexibility and agency theory perspectives

“…Furthermore, Vo and Ellis (2017) documented that merely low-levered Vietnamese firms can maximise stockholders' wealth. In the same way, Aras and Yildirim (2018), Dang et al (2019), Hang et al (2021), and Riddiough and Steiner (2020) hold the view that the lower the leverage, the higher the firm value.…”

“…They also have established the negative effect of debt financing on firm value (e.g. Caskey et al, 2012;Vo and Ellis, 2017;Hang et al, 2021). Other studies, however, have postulated the positive aspect of leverage (e.g.…”

Corporate financial hedging and firm value: a meta-analysis

“…To control for the impact of the hedging definition on the reported premium, we define a dummy that is equal to one if a study defines hedgers as derivatives users, and zero if studies also consider alternative strategies beyond derivatives use in their hedging definition. Following previous literature on the complementary relation between operational and financial hedging Hang et al, 2020), we predict that studies accounting for alternative hedging strategies report larger hedging premiums.…”

“…2019), we can observe that the literature taken together finds the following impact of the controls on the hedging variable: liquidity (negative), leverage (positive), dividend policy (positive), and managerial ownership (mixed). From another metaanalysis by Hang et al (2020) we know that the overall relation between liquidity and firm value is positive, and negative for leverage and dividend policy. For managerial ownership they do not report results.…”

“…A group of related meta-analyses synthesizes empirical studies examining the determinants of corporate hedging decisions (Arnold et al, 2014;Geyer-Klingeberg et al, 2019;Geyer-Klingeberg et al, 2018a;Hang et al, 2020). In contrast to these studies, we focus on the firm value effect of corporate hedging.…”