Does Hedging Increase Firm Value

Does Hedging Increase Firm Value?
Evidence from the princely Mining Industry
Does Hedging Increase Firm Value?

Rebekka Collins

This write up studies the relationship between risk management practices and firm range for a
sample of 44 trades union American bills mine firms from 1991 to 2000. We first show that
hedging activities are recognized by the market, as hedging variables do have an impact on
nervous strain price mental picture to money prices. Controlling for other variables, however, we cannot find
a positive relationship between hedging activities and firm values, as measured by Tobins Q
ratio. If anything, the relationship is negative. This result is mismatched with theories
implying that hedging increases firm value. In this industry, commodity price exposure is
transparent and easy to block by investors, so in that respect is no reason to expect that gold mining
firms hedging their gold price risk should have higher market values.
2
North American gold mining companies have vastly incompatible hedging practices. At one
end of the hedging spectrum, companies like American Barrick have been hedging extensively
their gold yield. At the other end, firms like Homestake Mining choose not to dishearten their
gold production at tout ensemble.
This raises a number of questions.



First, what could justify such opposite hedging
practices given that all of these companies have similar exposure to gold prices? Second, how
do these hedging policies affect company valuations, if at all?
Financial theories attempt to answer the first question by following one of devil groups of
explanations. The first group assumes that managers hedge to maximize firm value. In this
context, hedging can get through this goal by reducing the cost of financial distress, by reducing
expected taxes, or by relieving the under-investment problem.1 The second group assumes that
managers hedge for personal diversification purposes, or to maximize their personal utility.2
These two classes of explanation have very...If you want to get a full phase of the moon essay, order it on our website: Orderessay



If you want to get a full essay, wisit our page: write my essay .