Hedging and Company Value – A Comparison between South Africa and United States of America
Keywords:
The purpose of the study was to determine the impact of hedging with derivatives on company value on listed non-financial companies in South Africa (SA) and compare these to companies in a developed nation like the United States of America (USA) in termsAbstract
The purpose of the study was to determine the impact of hedging with derivatives on company value on listed non-financial companies in South Africa (SA) and compare these with companies in a developed nation like the United States of America (USA) in terms of how the use of derivatives impacts on the company value. The premium or discount in company value is represented by the Tobin’s Q ratio. The study analyses the different types of derivatives and what impact each type of derivative has on the company value from 2006-2009. In most cases, the outcome of the analysis did not find strong evidence that users’ of derivatives’ company values trade at a premium to non-users.
Â
References
• Allayannis, G. & Ofek, E, “Exchange Rate Exposure, Hedging, and the use of Foreign Currency Derivativesâ€, Journal of International Money and Finance, vol. 20, pp. 273-296, 2001.
• Allayannis, G. & Weston, J, “The Use of Foreign Currency Derivatives and Firm Market Valueâ€, Review of Financial Studies, vol. 14, pp. 243-276, 2001.
• Aretz , K. & Bartram, S, “Corporate Hedging and Shareholder Valueâ€, Working paper, Lancaster University Management School, London, 2009.
• Bartram, S. M, “Corporate risk management as a lever for shareholder value creationâ€, Financial markets, institutions and instruments, vol. 9, no. 5, pp. 279-324, 2000.
• Bartram, S.M., “Enhancing Shareholder Value with Corporate Risk Managementâ€, Corporate Finance Review, Vol. 7, no. 3, pp. 7-12, November/December 2002.
• Bartram, S.M., Brown, G.W. & Fehle,F., “International Evidence on Financial Derivatives Usageâ€, Financial Management, Vol. 38, no. 1, pp. 185-206, Spring 2009.
• Bartram, S., Brown, G. & Conrad, J., “The Effects of Firm Risks and Valueâ€, Working paper, Lancaster University, Management School, Lancaster, United Kingdom, 2009.
• Bessembinder, H., “Forward Contracts and Firm Value: Investment Incentive and Contracting Effectsâ€, Journal of Financial and Quantitative Analysis, vol. 26, no. 4, pp. 519-532, 1991.
• Bodnar, G.; Tang, C. & Weintrop, J., “Both Sides of Corporate Diversification: The Value Impact of Geographical and Industrial Developmentâ€, Working paper 6224, NBER, 1997.
• Brown, G. W., Crabb, P. R. & Haushalter, D., “Are Firms Successful At Selective Hedging?†Journal of Business, vol. 79, no. 6, pp. 2925-2949, 2006.
• Carter, D.A., Rogers, D.A. & Simkins, B., “Hedging and Value in the US Airline Industryâ€, Journal of Applied Corporate Finance, vol. 18, pp. 31-43, 2006.
• Clark, E., Judge, A. & Mefteh, S., “Corporate Hedging with Foreign Currency Derivatives and Firm Valueâ€, Unpublished paper. 2006.
• Faulkender, M. & Petersen, M.A., “Does the source of capital affect capital structure?†Review of Financial Studies, vol. 19, pp. 45-79, 2006.
• Froot, K., Scharfstein, D. & Stein, J., “Risk Management: Coordinating Corporate Investment and Financing Policiesâ€, The Journal of Finance, vol. 48, pp. 1629-1658, 1993.
• Graham, J.R. & Rogers, D.A., “Is Corporate Hedging Consistent with Value Maximization? An Empirical Analysis†.Journal of Finance, vol. 57, no. 2, pp. 815-840, 2002.
• Guay, W. & Kothari, S.P., “How Much Do Firms Hedge with Derivatives?†Journal of Financial Economics, Vol. 70, pp. 423-461, 2003.
• Jin, Y, & Jorion, P., “Firm value and hedging: Evidence from U.S. oil and gas producersâ€, Journal of Finance, vol. 61, pp. 893-919.
• Kapitsinas, S., “The Impact of Derivatives Usage on Firm Value: Evidence from Greeceâ€, Working paper, National and Kapodistrian University of Athens, 2008.
• Lang, L. & Stulz, R., “Tobin’s Q, Corporate Diversification and Firm Performanceâ€, .Journal of Political Economy, vol. 102, pp. 1248-1280, 1994.
• Lindenberg, E. B. & Ross, S.A., “Tobin's Q Ratio and Industrial Organizationâ€, Journal of Business, vol. 54, pp. 1-32, 1981.
• Lookman, A., “Does Hedging Increase Firm Value? Evidence from Oil and Gas Producing Firmsâ€â€™ Working paper, Carnegie Mellon University, 2004
• Magee, S., “Foreign Currency Hedging and Firm Value: A Dynamic Panel Approachâ€, Working paper, Macquarie University, 2009.
• Mayers, D. & Smith Jr, C.W. “On the Corporate Demand for Insurance: Evidence from the Reinsurance Marketâ€, Journal of Business, vol. 63, no. 1, pp. 19-40, 1990.
• Miller, M. and Modigliani, F., “The Cost of Capital, Corporate Finance and Theory of Investmentâ€, The American Economic Review, vol. 48, no. 3, pp. 261-297, 1958.
• Nain, A., “The Strategic Motives for Corporate Risk Managementâ€, Working paper, University of Michigan, 2004.
• Nance, D.R., Smith Jr, C.W. & Smithson, C.W. “On the Determinants of Corporate Hedging†Journal of Finance, vol. 48, no.1, pp. 267-284, 1993.
• Qing, C., “Exchange Rate Exposure, Corporate Hedging and Firm Market Valueâ€, Doctorate thesis, City University of Hong Kong, Japan, 2007.
• Servaes, H., “The Value of Diversification during the Conglomerate Merger Waveâ€, Journal of Finance, vol. 51, pp. 1201-1225.
• Smith, C. and Stulz, R., “The Determinants of Firms Hedging Policiesâ€, Journal of Financial and Qualitative Analysis, vol. 20, no. 4, pp. 391-405, 1985.
• South Africa, country information available [online]. Available fromhttp://www.southafrica.info> [Accessed 12 June 2010]
• Stulz, R.M., “Rethinking Risk Management “, .Bank of America Journal of Applied Corporate Finance, vol. 9, no. 3, pp. 8-24, 1996.
• Stulz, R.M., “Diminishing the Threats to Shareholder Wealthâ€, .Financial Times, Series Mastering Risk, pp. 8-10, April 25, 2000.
• Triki, T., “Research on Corporate Hedging Theories: A Critical Review of the Evidence to Dateâ€, Working paper, HEC Montreal, 2005.
• White, H., “A Heteroscedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroscedasticityâ€, Econometrica, vol. 48, pp. 817-838, 1980.
Downloads
Published
Issue
Section
License
- Papers must be submitted on the understanding that they have not been published elsewhere (except in the form of an abstract or as part of a published lecture, review, or thesis) and are not currently under consideration by another journal published by any other publisher.
- It is also the authors responsibility to ensure that the articles emanating from a particular source are submitted with the necessary approval.
- The authors warrant that the paper is original and that he/she is the author of the paper, except for material that is clearly identified as to its original source, with permission notices from the copyright owners where required.
- The authors ensure that all the references carefully and they are accurate in the text as well as in the list of references (and vice versa).
- Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
- Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
- Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access).
- The journal/publisher is not responsible for subsequent uses of the work. It is the author's responsibility to bring an infringement action if so desired by the author.
