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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 León Rincón

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  • Karen Julieth 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.

Suggested Citation

  • José Eduardo Gómez González & Carlos Eduardo León Rincón & Karen Julieth Leiton Rodríguez, 2009. "Does the Use of Foreign Currency Derivatives Affect Colombian Firms´ Market Value?," BORRADORES DE ECONOMIA 005514, BANCO DE LA REPÚBLICA.
  • Handle: RePEc:col:000094:005514
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    References listed on IDEAS

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    Cited by:

    1. Atilgan, Yigit & Demirtas, K. Ozgur & Simsek, Koray D., 2016. "Derivative markets in emerging economies: A survey," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 88-102.

    More about this item

    Keywords

    G32; G30; L25.Modigliani-Miller; risk management; hedging; firm value; emerging market;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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