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Abnormal Returns From Hedging, Firm Size, and the Fama and French Multifactor Models

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  • James M. Nelson

Abstract

I use the Fama and French (2015) five-factor model to reexamine the seemingly anomalous result of Nelson, Moffitt, and Affleck-Graves (2005), who document significant positive abnormal returns for firms that hedge. Contrary to their results, using the five-factor model on a new sample of U.S. firms from 2013 ¨C 2021, I observe significant negative monthly abnormal returns of -0.190% (-2.26% annually) for firms using derivative securities (hedgers). My result is consistent with poorly diversified managers engaging in costly hedging behavior that benefits management at the cost of shareholders. When I divide the sample by size (total assets), I find that the significant negative abnormal returns are confined only to large firms, offering no support for the economies of scale or managerial sophistication hypotheses.

Suggested Citation

  • James M. Nelson, 2023. "Abnormal Returns From Hedging, Firm Size, and the Fama and French Multifactor Models," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 14(2), pages 71-78, April.
    • Handle: RePEc:jfr:ijfr11:v:14:y:2023:i:2:p:71-78
    DOI: 10.5430/ijfr.v14n2p71
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    References listed on IDEAS

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    1. Belkhir, Mohamed & Boubaker, Sabri, 2013. "CEO inside debt and hedging decisions: Lessons from the U.S. banking industry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 223-246.
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