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Hedging Core and Non-Core Risks: Evidence from Forestry and Paper Industry

Ekholm, Hanna and Nguyen, Chi (2006)
Department of Business Administration
Abstract
A great number of empirical researches show that hedging is associated with higher firm value, particularly hedging interest rate and exchange rate. However, there is no clear support for value-added risk management hypothesis in the case of producers of commodities. Moreover, according to Shrand and Unal (1997), there are two types of risks, core business risks (or core risk) and homogeneous risks (or non core risks), which are based on a firm's comparative advantages with respects to the source of risk. Firm can earn economic profits for bearing core risks in which it has a comparative information advantage. Firm earn a zero economic rents for bearing non-core risks, where it has no advantage information than its competitors. Therefore,... (More)
A great number of empirical researches show that hedging is associated with higher firm value, particularly hedging interest rate and exchange rate. However, there is no clear support for value-added risk management hypothesis in the case of producers of commodities. Moreover, according to Shrand and Unal (1997), there are two types of risks, core business risks (or core risk) and homogeneous risks (or non core risks), which are based on a firm's comparative advantages with respects to the source of risk. Firm can earn economic profits for bearing core risks in which it has a comparative information advantage. Firm earn a zero economic rents for bearing non-core risks, where it has no advantage information than its competitors. Therefore, our objective is to study the impact of hedging commodity selling prices (could be core risk for some firms), interest rate and foreign exchange rate (non core risks) on firm value in a commodity industry - the forestry and paper industry in North America, Europe and Australia. Using Tobin's Q as an approximation for firm value, we find that hedging core risk is significantly associated with lower firm value and hedging non core risks is positively correlated with firm value. This result is robust to some control variables (size, profitability, access to financial market, leverage, growth opportunities). We conclude that the hedging premium depends on the types of risks to which the firm is exposed. (Less)
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author
Ekholm, Hanna and Nguyen, Chi
supervisor
organization
year
type
H1 - Master's Degree (One Year)
subject
keywords
Risk Management, Core Risk, Non-Core Risk, Hedging, Management of enterprises, Företagsledning, management
language
Swedish
id
1348134
date added to LUP
2006-06-05
date last changed
2012-04-02 16:01:24
@misc{1348134,
  abstract     = {A great number of empirical researches show that hedging is associated with higher firm value, particularly hedging interest rate and exchange rate. However, there is no clear support for value-added risk management hypothesis in the case of producers of commodities. Moreover, according to Shrand and Unal (1997), there are two types of risks, core business risks (or core risk) and homogeneous risks (or non core risks), which are based on a firm's comparative advantages with respects to the source of risk. Firm can earn economic profits for bearing core risks in which it has a comparative information advantage. Firm earn a zero economic rents for bearing non-core risks, where it has no advantage information than its competitors. Therefore, our objective is to study the impact of hedging commodity selling prices (could be core risk for some firms), interest rate and foreign exchange rate (non core risks) on firm value in a commodity industry - the forestry and paper industry in North America, Europe and Australia. Using Tobin's Q as an approximation for firm value, we find that hedging core risk is significantly associated with lower firm value and hedging non core risks is positively correlated with firm value. This result is robust to some control variables (size, profitability, access to financial market, leverage, growth opportunities). We conclude that the hedging premium depends on the types of risks to which the firm is exposed.},
  author       = {Ekholm, Hanna and Nguyen, Chi},
  keyword      = {Risk Management,Core Risk,Non-Core Risk,Hedging,Management of enterprises,Företagsledning, management},
  language     = {swe},
  note         = {Student Paper},
  title        = {Hedging Core and Non-Core Risks: Evidence from Forestry and Paper Industry},
  year         = {2006},
}