The Determinants and Value Effects of Corporate Hedging: An Empirical Study of Hong Kong and Chinese Firms
41 Pages Posted: 11 Sep 2006
Date Written: August 2006
Abstract
This paper studies the determinants and the value effects of corporate hedging for 227 Hong Kong and Chinese companies listed on the Hong Kong stock exchange. Using data from disclosures in the annual reports, we find strong evidence linking the decision to hedge and the expected costs of financial distress for the overall sample. The results are stronger for the HK firms than the Chinese firms, perhaps due to the fact that as a major shareholder in most of the Chinese companies, the State is a guarantor of the debt. Our results show a negative relationship between hedging and State ownership. The other determinants of hedging identified in this paper are foreign currency exposure, reflected in levels of foreign sales and foreign debt, economies of scale in derivative hedging costs, and levels of liquidity. We also show that the debt tax benefits of hedging add about 0.88% to the value of HK firms and 0.56% to Chinese firms.
Keywords: Corporate hedging, Foreign currency hedging, Derivatives, Financial distress, Debt capacity, Hong Kong, China
JEL Classification: F30, G32, G33
Suggested Citation: Suggested Citation
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