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Does hedging with derivatives create firm value?

Nilsson, Albin LU and Beckman, August LU (2023) NEKN02 20231
Department of Economics
Abstract
This paper studies the impact derivative hedging has on firm value and whether the relationship is affected by differences in cash holdings. We use hand-collected data for 171 Swedish firms from various industries during the period 2016-2021 to examine the relationship. Using a multivariate regression approach with Tobin’s Q as a proxy for firm value, we find that firms using derivatives are associated with higher firm value. Furthermore, the result shows a positive and significant effect for foreign exchange hedging but negative and insignificant effects for interest rate and commodity hedging. This suggests that the effect of hedging is highly dependent on the risk hedged. Finally, this study finds no evidence for the hypothesis that... (More)
This paper studies the impact derivative hedging has on firm value and whether the relationship is affected by differences in cash holdings. We use hand-collected data for 171 Swedish firms from various industries during the period 2016-2021 to examine the relationship. Using a multivariate regression approach with Tobin’s Q as a proxy for firm value, we find that firms using derivatives are associated with higher firm value. Furthermore, the result shows a positive and significant effect for foreign exchange hedging but negative and insignificant effects for interest rate and commodity hedging. This suggests that the effect of hedging is highly dependent on the risk hedged. Finally, this study finds no evidence for the hypothesis that cash holdings moderate the effect derivative hedging has on firm value. The results obtained in this study contribute both to the previous literature on derivative hedging and the literature about the integrated management of cash holdings and derivatives. (Less)
Please use this url to cite or link to this publication:
author
Nilsson, Albin LU and Beckman, August LU
supervisor
organization
course
NEKN02 20231
year
type
H1 - Master's Degree (One Year)
subject
keywords
Corporate Risk Management, Hedging, Cash Holdings, Derivatives, Firm Value
language
English
id
9133198
date added to LUP
2023-11-24 08:57:18
date last changed
2023-11-24 08:57:18
@misc{9133198,
  abstract     = {{This paper studies the impact derivative hedging has on firm value and whether the relationship is affected by differences in cash holdings. We use hand-collected data for 171 Swedish firms from various industries during the period 2016-2021 to examine the relationship. Using a multivariate regression approach with Tobin’s Q as a proxy for firm value, we find that firms using derivatives are associated with higher firm value. Furthermore, the result shows a positive and significant effect for foreign exchange hedging but negative and insignificant effects for interest rate and commodity hedging. This suggests that the effect of hedging is highly dependent on the risk hedged. Finally, this study finds no evidence for the hypothesis that cash holdings moderate the effect derivative hedging has on firm value. The results obtained in this study contribute both to the previous literature on derivative hedging and the literature about the integrated management of cash holdings and derivatives.}},
  author       = {{Nilsson, Albin and Beckman, August}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Does hedging with derivatives create firm value?}},
  year         = {{2023}},
}