Does hedging with derivatives create firm value?

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.