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Corporate Hedging Policy and Equity Mispricing

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  • J. Barry Lin
  • Christos Pantzalis
  • Jung Chul Park
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    Abstract

    We show that firms' use of derivatives is negatively associated with stock mispricing. This result is consistent with the notion that hedging improves the transparency and predictability of firms' cash flows resulting in less misvaluation. Furthermore, we show that the negative relationship between mispricing and hedging is particularly strong when market value is below fundamental value, which is consistent with prior evidence that hedging has a positive impact on firm valuation. Finally, we provide evidence that a "spread-out" hedging policy that entails the use of a variety of derivative contracts can be more effective in reducing mispricing. Copyright (c) 2010, The Eastern Finance Association.

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    Bibliographic Info

    Article provided by Eastern Finance Association in its journal Financial Review.

    Volume (Year): 45 (2010)
    Issue (Month): 3 (08)
    Pages: 803-824

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    Handle: RePEc:bla:finrev:v:45:y:2010:i:3:p:803-824

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    Web page: http://www.easternfinance.org/
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