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Determinant of Hedging and Its Impact on Firm Value : After Controlling Endogeneity Problem Using a Two-Stage Analysis

A derivative market in Korea was used to be one of the biggest markets in the world, but it has dramatically decreased after 2011, and now, trading volume of Korea Exchange becomes 1/3 compared to that in 2011. Given that the unprecedented change in the derivative market in Korea, in this study, we suggest that it is caused by the inefficient use of derivatives by Korean firms which led to significant financial loss by analyzing the relation between hedging and firm value. To avoid endogeniety problem between these two variables, we use a two-stage analysis. At a first stage, we regress hedging on several control variables which are known to affect hedging theoretically or empirically, and we calculate the predicted value of hedging. Then we put this predicted value into a second stage model as an independent variable. The result of the first stage analysis also provides information about the determinant of hedging. The result of a second stage analysis shows that the use of derivatives itself significantly reduces firm value, but if a firm has decided to use derivative, then the extent of hedging increases its value. Thus, we conclude that a decision to use derivatives for hedging is, in fact, harmful for firm value in Korea because Korean firms may use them inefficiently. However, extensive users utilize derivative more efficiently than moderate users do.

Abstract

1. Introduction

2. Literature Review

3. Variable and Methodology

4. Empirical Results

5. Conclusion

Reference

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