The impact of currency hedging on firm market value: Empirical Evidence from 2011 – 2015

Abstract

Examining the impact that the use of foreign exchange derivatives have on firm market value is the main purpose of this study, whilst the observation period is 2011 – 2015. The sample firms are the non-financial firms that are listed in the main list of Nasdaq OMX Helsinki. The Finnish market has not been studied extensively on this regard, thus one of the purposes of this study is to provide new information. The Finnish market is interesting because of its distinctive nature, which comes from the small size and geographical location that makes the Finnish market highly dependent on foreign trade. Therefore, the use of currency derivatives is a substantive subject on this market.

Tobin’s Q is used as an indicator for firm market value and its natural logarithm is used as a dependent variable in both univariate and multivariate regressions. All regressions are executed using the pooled OLS regression model. In addition, fixed effects regression is implemented to eliminate the bias of missing variables. Multivariate analysis includes six variables addition to foreign currency derivatives use.

The use of currency derivatives has a statistically significant negative effect on firm market value. Even firms with foreign sales that are categorized as non-hedger have a higher Tobin’s Q values than firms that are categorized as hedgers.