FX Risk Management and Shareholder Value: Evidence from the Nordic Stock Markets

Abstract

Unexpected fluctuations in foreign exchange rates can cause considerable financial losses and unpredictability in firm’s available capital. Measuring and managing the FX exposure is often described to be challenging as the risk can be faced through operational transactions, but also indirectly through customers, suppliers, and competitors. Foreign exchange rate hedging should allow firms to reduce the risk exposure and increase firm value by reducing the cash flow volatility.

This thesis examines if financial FX hedging with derivatives has any firm value impact in the smaller Nordic markets. The Nordic markets provide interesting sample as Finland, Norway, Denmark, and Sweden all have their distinctive features, such as national currencies, industry distributions due to geographical differences, and the presence of European Union. This thesis presents financial FX risk management as a valuable tool for nonfinancial firms to reduce their risk exposure and support firm value creation. Prior literature has often covered that the results regarding currency hedging and firm value are mixed. However, the more common conclusion has been that currency hedging has neutral or positive firm value impact.

To examine the relation between firm value and FX hedging, this thesis uses data collected for 205 nonfinancial Nordic firms over the years 2016-2019. Data for currency hedging activity is collected manually from firms’ annual statements. To study the firm value impact of FX hedging, this thesis uses fixed-effect OLS regression for the estimations. Thesis uses firm-specific control variables, such as firm size, leverage, profitability, and export ratio. Additionally, data is categorized by country and industry sector.

This thesis shows that Nordic nonfinancial firms experience positive firm value premium from currency hedging activities. Firms hedging the currency risk are found to have 25% higher firm valuations in the markets when measured by Tobin’s Q. However, The Nordic evidence on firm value premium is consistent with prior literature by providing somewhat mixed results between different countries and industry sectors. The evidence is still more consistently signaling that FX hedging does increase firm value in the Nordic markets.