Abstract
This paper investigates the effect of financial and non-financial hedging on firms' value while mitigating the exchange rate exposure for 97 Indian multinational corporations from 2009 to 2020. Despite mixed evidence of the value increment effect of corporate hedging, the reduction effect is sporadic. With a dynamic panel set-up and applying the two-step GMM model, the result shows no impact from operation hedging on firms' value. In contrast, financial hedging is significant and impactful. Firms' value enhanced on average by 16.64–19.65% and 10.33–16.15% through derivative and foreign debt, respectively, after controlling non-operating profit (loss) from foreign exchange accounting and translation profit (loss) simultaneously and separately. The result of the robustness test is also consistent with the findings. The positive valuation effect motivates the decision maker of Indian MNCs to hedge the risk of foreign exchange exposure through derivatives and debts.
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Notes
Studies (Carter et al. 2005; Gómez-González et al. 2012; Graham and Rogers 2002; Júnior and Laham 2008; Luo and Wang 2018; Nguyen and Faff 2010) give evidence of the positive effect, contrary to (Alam and Gupta 2018; Callahan 2002; Jin and Jorion 2006; Lau 2016; Santos et al. 2017) studies exhibits the negative effect of financial hedging on a firm’s value.
studies by Vivel Búa et al. (2015) on Spanish, by Gómez-González, León Rincón, and Leiton Rodríguez (2012) on Colombian and by Luo and Wang (2018) on Chinese firm.
In order to obtain information related to foreign exchange profit and loss transactions, the notes to the consolidated financial statement are investigated.
Tobin’s Q is the ratio of the resulted value of the book value of assets minus the book value of equity plus the market value of equity to the book value of the assets.
In pursuance of(Carter et al. 2006; Gleason et al. 2005; Kim et al. 2006; Vivel Búa et al. 2015), countries are grouped into 11 regions: Asia (Ex. Near East), East Asia, Baltics, C.W. of IND. States, Eastern Europe, Latin Amer. & Carib, Northern Africa, Northern America, Oceania, Sub-Saharan Africa, Western Europe.
Since, the version is “log-linear” and “β” is the envisioned coefficient, one-unit alter in independent variable results in alternation in log dependent variable of “β” units, the value of dependent variable is multiplication of “eβ.” In different words, one-unit growth in independent variable leads to “100 × (e.β-1)” percent within the dependent variable. (Benoit 2011).
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All authors contributed equally to this research work. Mr. Jyoti Prakash Das contributed to concept and model development, data collection and analysis, and editing. Dr. Shilendra Kumar has developed the idea further and suggested a research methodology. All authors read and approved the final manuscript.
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Appendix
Appendix
A 1. Measurement of model variable and expected sign
Variables | Definitions | Expected sign | Data description |
|---|---|---|---|
Explained variable | |||
LNQt | Ln(Tobin's Q) | (Book Value of Total Asset-Book Value of equity + Market Value of Equity) / Book Value of Total Asset | |
Explanatory variable | |||
FCDERVR | FC derivatives | ± | Summation of the notional value of currency derivatives contracts / total sales |
FCDEBTR | FC denominated Debt | ± | Summation of the nominal value of foreign currency-denominated debt / total sales |
OH_COUNT | Ln(No. of countries) | + | Natural log of the number of other than home countries where the company has a subsidiary |
OH_REGIO | Ln(No. of regions) | + | Natural log of the number of regions the company operate in |
HHIcount | Hirshman–Herfindahl Index (based on country) | + | \({1} - {\text{Hirshman - Herfindahl}} = 1 - \frac{{\sum\nolimits_{j} {Sub_{j}^{2} } }}{{\left( {\sum\nolimits_{j} {Sub_{j} } } \right)^{2} }}\) |
HHIregio | Hirshman–Herfindahl Index (based on region) | + | \({1} - {\text{Hirshman - Herfindahl}} = 1 - \frac{{\sum\nolimits_{j} {Sub_{j}^{2} } }}{{\left( {\sum\nolimits_{j} {Sub_{j} } } \right)^{2} }}\) |
FEXGAINTSA&TSL | Foreign exchange gain and losses ratio | ± | (Sum of profit from FX Transaction & Translation – Sum of losses from FX Transaction & Translation Losses) / total sales |
FEXGAINTSA | FX transaction ratio | ± | FX transaction / total sales |
FEXGAINTSL | FX translation ratio | ± | FX translation / total sales |
Control variable | |||
FSALESR | Foreign Sales | ± | Foreign sales revenue / total sales revenue |
FSIZE | Firm Size | ± | Natural log of total asset |
FLEVERAGE | Leverage | ± | Total debt / total asset |
FPROFR | Profitability | + | Net profit / total asset |
FLIQR | Liquidity | ± | Current asset / current liabilities |
FGROWTHR | Growth rate | + | One-year net revenue growth rate |
FPUBLICITY | Investment opportunity | + | Advertising Expenses / total sales |
FR&D | + | R&D Expenses / total assets | |
YEARD | Year dummy | ± | Taking 1 for each specific year and otherwise 0 (2009–2020) |
A 2. Descriptive statistics of financial hedging instruments
2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2009–20 Average | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Panel A. Use of derivative | |||||||||||||
Users | 67 | 67 | 68 | 70 | 70 | 72 | 75 | 77 | 78 | 78 | 78 | 78 | |
Percentage | 81.71 | 81.71 | 81.93 | 82.35 | 80.46 | 80.00 | 78.13 | 79.38 | 80.41 | 80.41 | 80.41 | 80.41 | 80.61 |
Non-users | 15 | 15 | 15 | 15 | 15 | 15 | 15 | 19 | 19 | 19 | 19 | 19 | |
Percentage | 18.29 | 18.29 | 18.07 | 17.65 | 17.24 | 16.67 | 15.63 | 19.59 | 19.59 | 19.59 | 19.59 | 19.59 | 18.31 |
Panel B. Use of debt | |||||||||||||
Users | 33 | 33 | 33 | 33 | 33 | 33 | 35 | 36 | 39 | 40 | 40 | 40 | |
Percentage | 40.24 | 40.24 | 39.76 | 38.82 | 37.93 | 36.67 | 36.46 | 37.11 | 40.21 | 41.24 | 41.24 | 41.24 | 39.26 |
Non-users | 49 | 49 | 50 | 52 | 52 | 54 | 55 | 60 | 58 | 57 | 57 | 57 | |
Percentage | 59.76 | 59.76 | 60.24 | 61.18 | 59.77 | 60.00 | 57.29 | 61.86 | 59.79 | 58.76 | 58.76 | 58.76 | 59.66 |
Panel C: Financial hedging | |||||||||||||
Only FC Derivative users | 35 | 35 | 36 | 38 | 38 | 38 | 40 | 40 | 40 | 40 | 40 | 40 | 38.33 |
Percentage | 42.68 | 42.68 | 43.37 | 44.71 | 43.68 | 42.22 | 41.67 | 41.24 | 41.24 | 41.24 | 41.24 | 41.24 | 42.27 |
Only FC Debt users | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2 | 1.42 |
Percentage | 1.22 | 1.22 | 1.20 | 1.18 | 1.15 | 1.11 | 1.04 | 2.06 | 2.06 | 2.06 | 2.06 | 2.06 | 1.54 |
FC Derivative and FC Debt | |||||||||||||
User | 32 | 32 | 32 | 32 | 32 | 34 | 35 | 37 | 38 | 38 | 38 | 38 | 34.83 |
Percentage (Users) | 39.02 | 39.02 | 38.55 | 37.65 | 36.78 | 37.78 | 36.46 | 38.14 | 39.18 | 39.18 | 39.18 | 39.18 | 38.34 |
Non-users | 14 | 14 | 14 | 14 | 14 | 14 | 14 | 17 | 17 | 17 | 17 | 17 | 15.25 |
Percentage (Non-Users) | 17.07 | 17.07 | 16.87 | 16.47 | 16.09 | 15.56 | 14.58 | 17.53 | 17.53 | 17.53 | 17.53 | 17.53 | 16.78 |
Number of observations | 82 | 82 | 83 | 85 | 87 | 90 | 96 | 97 | 97 | 97 | 97 | 97 | |
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Das, J.P., Kumar, S. Impact of corporate hedging practices on firm's value: An empirical evidence from Indian MNCs. Risk Manag 25, 10 (2023). https://doi.org/10.1057/s41283-023-00115-3
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DOI: https://doi.org/10.1057/s41283-023-00115-3