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The Value of Hedging

Thorsheim, Marcus; Hansson, Karl-Fredrik and Bergstrand, André (2009)
Department of Business Administration
Abstract
The purpose of this study is to investigate to what extent currency derivatives is value creating for Swedish firms, and if so, we aim towards determining the source of the value creation. The theoretical framework covers risk management theories regarding underinvestment, financial distress, tax incentives and managerial risk aversion. Furthermore, we present a review of previous empirical studies covering the applicability of risk management theories and proof of value creation derived from risk management. Our sample contains 108 listed firms on the Swedish market during 2005-2008 and the analysis is conducted through a quantitative approach using multiple regression analysis. Our findings show that Swedish firms hedging their foreign... (More)
The purpose of this study is to investigate to what extent currency derivatives is value creating for Swedish firms, and if so, we aim towards determining the source of the value creation. The theoretical framework covers risk management theories regarding underinvestment, financial distress, tax incentives and managerial risk aversion. Furthermore, we present a review of previous empirical studies covering the applicability of risk management theories and proof of value creation derived from risk management. Our sample contains 108 listed firms on the Swedish market during 2005-2008 and the analysis is conducted through a quantitative approach using multiple regression analysis. Our findings show that Swedish firms hedging their foreign currency exposure are assigned a premium of 4-21%. The value is independent of short-term fluctuations in exchange rates and investors seem to value the long-term benefits from risk management. The most significant source of value is the use of hedging to relieve underinvestment problems, followed by a lower probability of financial distress. Lastly, the findings suggest that Swedish currency hedgers are not making use of the additional debt capacity created through hedging and is therefore foregoing value increasing tax-shields. (Less)
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@misc{1437367,
  abstract     = {The purpose of this study is to investigate to what extent currency derivatives is value creating for Swedish firms, and if so, we aim towards determining the source of the value creation. The theoretical framework covers risk management theories regarding underinvestment, financial distress, tax incentives and managerial risk aversion. Furthermore, we present a review of previous empirical studies covering the applicability of risk management theories and proof of value creation derived from risk management. Our sample contains 108 listed firms on the Swedish market during 2005-2008 and the analysis is conducted through a quantitative approach using multiple regression analysis. Our findings show that Swedish firms hedging their foreign currency exposure are assigned a premium of 4-21%. The value is independent of short-term fluctuations in exchange rates and investors seem to value the long-term benefits from risk management. The most significant source of value is the use of hedging to relieve underinvestment problems, followed by a lower probability of financial distress. Lastly, the findings suggest that Swedish currency hedgers are not making use of the additional debt capacity created through hedging and is therefore foregoing value increasing tax-shields.},
  author       = {Thorsheim, Marcus and Hansson, Karl-Fredrik and Bergstrand, André},
  keyword      = {currency derivatives,exchange rate risk,exchange rate risk exposure,value creation,underinvestment,financial distress,debt capacity,managerial risk aversion.,risk management,Management of enterprises,Företagsledning, management},
  language     = {swe},
  note         = {Student Paper},
  title        = {The Value of Hedging},
  year         = {2009},
}