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


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  • José Eduardo Gómez González


  • Carlos Eduardo Léon Gómez


  • Karen Juliet Leiton Rodríguez



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.

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

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Handle: RePEc:bdr:borrec:562

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

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  1. Bartram, Söhnke M. & Brown, Gregory W. & Conrad, Jennifer, 2006. "The Effects of Derivatives on Firm Risk and Value," MPRA Paper 9831, University Library of Munich, Germany, revised 24 Jul 2008.
  2. Sohnke M. Bartram, 2001. "Corporate Risk Management as a Lever for Shareholder Value Creation," Finance, EconWPA 0108002, EconWPA, revised 10 Aug 2001.
  3. Nance, Deana R & Smith, Clifford W, Jr & Smithson, Charles W, 1993. " On the Determinants of Corporate Hedging," Journal of Finance, American Finance Association, American Finance Association, vol. 48(1), pages 267-84, March.
  4. Bruce C. Greenwald & Joseph E. Stiglitz, 1990. "Asymmetric Information and the New Theory of the Firm: Financial Constraints and Risk Behavior," NBER Working Papers 3359, National Bureau of Economic Research, Inc.
  5. Hoa Nguyen & Robert Faff, 2007. "Are Financial Derivates Really Value Enhancing? Australian Evidence," Accounting, Finance, Financial Planning and Insurance Series, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance 2007_14, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  6. Stiglitz, Joseph E, 1974. "On the Irrelevance of Corporate Financial Policy," American Economic Review, American Economic Association, American Economic Association, vol. 64(6), pages 851-66, December.
  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. Kevin Aretz & Söhnke M. Bartram, 2010. "Corporate Hedging And Shareholder Value," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, Southern Finance Association;Southwestern Finance Association, vol. 33(4), pages 317-371, December.
  9. Perfect, Steven B. & Wiles, Kenneth W., 1994. "Alternative constructions of Tobin's q: An empirical comparison," Journal of Empirical Finance, Elsevier, Elsevier, vol. 1(3-4), pages 313-341, July.
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  11. Geczy, Christopher & Minton, Bernadette A & Schrand, Catherine, 1997. " Why Firms Use Currency Derivatives," Journal of Finance, American Finance Association, American Finance Association, vol. 52(4), pages 1323-54, September.
  12. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 147-175, November.
  13. Daines, Robert, 2001. "Does Delaware law improve firm value?," Journal of Financial Economics, Elsevier, Elsevier, vol. 62(3), pages 525-558, December.
  14. Smith, Clifford W. & Stulz, René M., 1985. "The Determinants of Firms' Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 20(04), pages 391-405, December.
  15. Dierkens, Nathalie, 1991. "Information Asymmetry and Equity Issues," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 26(02), pages 181-199, June.
  16. John R. Graham & Clifford W. Smith, 1999. "Tax Incentives to Hedge," Journal of Finance, American Finance Association, American Finance Association, vol. 54(6), pages 2241-2262, December.
  17. Yanbo Jin & Philippe Jorion, 2006. "Firm Value and Hedging: Evidence from U.S. Oil and Gas Producers," Journal of Finance, American Finance Association, American Finance Association, vol. 61(2), pages 893-919, 04.
  18. Kevin Aretz & Söhnke M. Bartram & Gunter Dufey, 2007. "Why hedge? Rationales for corporate hedging and value implications," Journal of Risk Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 8(5), pages 434-449, November.
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