Corporate hedging and firm value. Can corporate hedging increase firm value?

Abstract

Finance theory indicates that corporate hedging can increase firm value by reducing costs of taxes, financial distress and agency costs, and by reducing cash flow volatility. This paper covers both a direct effect of corporate hedging on firm value, as well as the effect of corporate hedging on stock price return volatility. A panel data sample of 53 U. S. firms with quarterly data for 5 consecutive years is used to research the effect of hedging on firm value and stock price return volatility. Using a OLS-regression I find that hedging has no significant effect on stock price return volatility. I also find very limited support for the hypothesis that hedging increases firm value. Overall I find limited support for positive effects of corporate hedging for the firms in the sample.