Capital expenditures, corporate hedging and firm value

Ullah, Subhan; Irfan, Muhammad; Kim, Ja Ryong; Ullah, Farid

Abstract

Despite the well-documented mixed results of hedging on firm value, empirical evidence of why hedging reduces firm value is rare. Theory suggests that hedging can increase firm value by reducing bankruptcy cost and volatility, although it can also decrease firm value through a manager's utility maximization. This study explores the reduction of market dependence and the over-investment hypothesis that results in decreasing firm value. By studying UK domiciled oil and gas companies, we found that capital expenditure accompanied by hedging reduces firm value, although capital expenditure itself increases firm value. This effect is pronounced when capital expenditure is made by firms with foreign operations, suggesting that hedging reduces the effect of the market's monitoring role and, therefore, capital expenditure with hedging tends to be perceived as over-investment. This paper is one of the first studies that empirically examine the reduction of market dependence and over-investment through hedging.

Citation

Ullah, S., Irfan, M., Kim, J. R., & Ullah, F. (2022). Capital expenditures, corporate hedging and firm value. Quarterly Review of Economics and Finance, 87, 360-366. https://doi.org/10.1016/j.qref.2021.06.008

• Journal Article Type: Article
• Acceptance Date: Jun 27, 2021
• Online Publication Date: Jun 29, 2021
• Publication Date: 2022-02
• Deposit Date: Jun 28, 2021
• Publicly Available Date: Jun 30, 2023
• Journal: Quarterly Review of Economics and Finance
• Print ISSN: 1062-9769
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 87
• Pages: 360-366
• DOI: https://doi.org/10.1016/j.qref.2021.06.008
• Keywords: Economics and Econometrics; Finance
• Public URL: https://nottingham-repository.worktribe.com/output/5744660
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S1062976921001083