The Hedging Premium

Abstract: Seminar Date: 2022-06-01 Course: BUSN79, Degree Project in Accounting and Finance Authors: Jakob Mathiasson & Philip Hausenkamph Examiner: Reda Moursli Key Words: Risk Management, Hedging, Firm Value, Insider Ownership, Foreign Ownership Purpose: The purpose of this paper is to investigate the impact of hedging derivatives on firm valuation in present time, as well as the partial effect of different corporate ownership structures affecting the relationship between hedging and firm value. Methodology: The econometrical approach is based on a random effects model, however also complimented by a fixed effects model. An instrumental variable approach is introduced to deal with endogeneity concerns. Further, to test for the partial effect’s interaction terms are introduced. Lastly, we present robustness checks by introducing several regression models clustered on different levels. Theoretical Perspectives: The theoretical framework of this study is based upon critical assessment of the classical Irrelevance theory. Moreover, the paper introduces several theories of value determinants through hedging activities, such as Hedging Convexity Functions, The Underinvestment Problem, Agency Theories and Enterprise Risk Management. Empirical Foundation: The study consists of a sample of 297 Swedish non-financial firms listed on the main market in the period of 2017-2021. Conclusion: This study finds significant evidence of a hedging premium of 15,3% for hedging firms, compared to non-hedging companies. Uniquely and contradicting previous studies made on managerial entrenchment affecting hedging decisions, we find no evidence for management or BoD insider ownership affecting the relationship between hedging and firm value. Instead, we provide evidence of a positive significant relationship between firm value and hedging for firms with higher foreign ownership, indicating that foreign owners increase firm value through enhanced hedging strategies.