Advanced Search
MyIDEAS: Login

Does the Use of Foreign Currency Derivatives Affect Colombian Firms’ Market Value?

Contents:

Author Info

  • José Eduardo Gómez González

    ()

  • Carlos Eduardo Léon Gómez

    ()

  • Karen Juliet Leiton Rodríguez

    ()

Abstract

Classic financial theory relies on the absolute perfection of capital markets, which results in one of the milestones of theoretical corporate finance: the firm’s value is invariant to the choice of capital structure. As an extension to the aforementioned proposition by Modigliani and Miller (1958), corporate risk management is also futile. Nevertheless, it is clear that capital markets do not work with absolute perfection. There exist frictions which make risk management decisions essential for the firm’s value. Moreover, derivatives’ market vast importance is a good proxy of the relevance of hedging decisions for corporate finance. There is a remarkable volume of literature which tests the effects of risk management and hedging decisions for the value of the firm, mainly for the US corporate market. However, there is little effort on this subject for markets which work even farther from absolute perfection. This document undertakes such task for the Colombian market. Focused on non-financial firms and the local’s most liquid derivatives market, we find that for a panel of eight large Colombian corporations, the growth rate of Tobin´s Q depends significantly on firm´s size and hedging. Our results suggests that, after controlling for relevant financial variables such as firm´s profitability and leverage, and other variables such as firm´s age, an increase in hedging leads to a higher growth in the firm´s value.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.banrep.gov.co/docum/ftp/borra562.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 562.

as in new window
Length:
Date of creation:
Date of revision:
Handle: RePEc:bdr:borrec:562

Contact details of provider:
Postal: Cra 7 # 14-78 Piso 7
Phone: (57-1) 3431111
Fax: (57-1) 2841686
Email:
Web page: http://www.banrep.org/publicaciones/pub_borra.htm
More information through EDIRC

Related research

Keywords: Modigliani-Miller; risk management; hedging; firm value; emerging market; Tobin´s Q. Classification JEL: G32; G30; L25.;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Stiglitz, Joseph E, 1974. "On the Irrelevance of Corporate Financial Policy," American Economic Review, American Economic Association, vol. 64(6), pages 851-66, December.
  2. Greenwald, Bruce C & Stiglitz, Joseph E, 1990. "Asymmetric Information and the New Theory of the Firm: Financial Constraints and Risk Behavior," American Economic Review, American Economic Association, vol. 80(2), pages 160-65, May.
  3. Smith, Clifford W. & Stulz, René M., 1985. "The Determinants of Firms' Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 391-405, December.
  4. Nance, Deana R & Smith, Clifford W, Jr & Smithson, Charles W, 1993. " On the Determinants of Corporate Hedging," Journal of Finance, American Finance Association, vol. 48(1), pages 267-84, March.
  5. Geczy, Christopher & Minton, Bernadette A & Schrand, Catherine, 1997. " Why Firms Use Currency Derivatives," Journal of Finance, American Finance Association, vol. 52(4), pages 1323-54, September.
  6. Kevin Aretz & Söhnke M. Bartram & Gunter Dufey, 2007. "Why hedge? Rationales for corporate hedging and value implications," Journal of Risk Finance, Emerald Group Publishing, vol. 8(5), pages 434-449, November.
  7. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1992. "Risk Management: Coordinating Corporate Investment and Financing Policies," NBER Working Papers 4084, National Bureau of Economic Research, Inc.
  8. Sohnke M. Bartram, 2001. "Corporate Risk Management as a Lever for Shareholder Value Creation," Finance 0108002, EconWPA, revised 10 Aug 2001.
  9. John R. Graham & Clifford W. Smith, 1999. "Tax Incentives to Hedge," Journal of Finance, American Finance Association, vol. 54(6), pages 2241-2262, December.
  10. Aretz, Kevin & Bartram, Söhnke M., 2009. "Corporate Hedging and Shareholder Value," MPRA Paper 14088, University Library of Munich, Germany.
  11. Yanbo Jin & Philippe Jorion, 2006. "Firm Value and Hedging: Evidence from U.S. Oil and Gas Producers," Journal of Finance, American Finance Association, vol. 61(2), pages 893-919, 04.
  12. Dierkens, Nathalie, 1991. "Information Asymmetry and Equity Issues," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(02), pages 181-199, June.
  13. Bartram, Söhnke M. & Brown, Gregory W. & Conrad, Jennifer, 2011. "The Effects of Derivatives on Firm Risk and Value," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(04), pages 967-999, September.
  14. John Affleck-Graves, 2002. "Earnings Predictability, Information Asymmetry, and Market Liquidity," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 561-583, 06.
  15. Hoa Nguyen & Robert Faff, 2007. "Are Financial Derivates Really Value Enhancing? Australian Evidence," Accounting, Finance, Financial Planning and Insurance Series 2007_14, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  16. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
  17. Daines, Robert, 2001. "Does Delaware law improve firm value?," Journal of Financial Economics, Elsevier, vol. 62(3), pages 525-558, December.
  18. Perfect, Steven B. & Wiles, Kenneth W., 1994. "Alternative constructions of Tobin's q: An empirical comparison," Journal of Empirical Finance, Elsevier, vol. 1(3-4), pages 313-341, July.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:bdr:borrec:562. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Camilo Millán).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.