Is corporate hedging always beneficial? A theoretical and empirical analysis

Hany Ahmed, Richard Fairchild, Yilmaz Guney

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)
160 Downloads (Pure)


This paper investigates, theoretically and empirically, the impact of corporate hedging activities on firm value/performance. In a perfect market, with self-less management, aiming to maximise shareholder wealth, it may be expected that hedging would improve firm performance and add value. Our major contribution in this paper is that we first demonstrate theoretically the conditions under which hedging can increase or decrease firm value. Our theoretic model demonstrates that the ambiguous relationship between hedging and firm value may be due to a subtle combination of economic (managerial self-interest, agency problems/moral hazard, managerial ability, managerial risk aversion) and behavioural factors (overconfidence). Our empirical analysis confirms the ambiguous effect of hedging on firm performance. Empirically, we focus on the use of derivatives in the corporate hedging of three types of financial risk (foreign currency, interest rate and commodity price risks), and examine the effect on value and performance of listed UK corporations during 2005-2017. We demonstrate that the positive or negative effects of the hedging strategies varies significantly across both the financial risk that is hedged and the type of derivatives contracts used in the hedging as well as the time period in consideration.

Original languageEnglish
Pages (from-to)1746-1780
Number of pages35
JournalThe European Journal of Finance
Issue number17
Early online date3 Jul 2020
Publication statusPublished - 2020

Bibliographical note

This is an Accepted Manuscript of an article published by Taylor & Francis in The European Journal of Finance on 03/07/2020, available online:

Copyright © and Moral Rights are retained by the author(s) and/ or other copyright owners. A copy can be downloaded for personal non-commercial research or study, without prior permission or charge. This item cannot be reproduced or quoted extensively from without first obtaining permission in writing from the copyright holder(s). The content must not be changed in any way or sold commercially in any format or medium without the formal permission of the copyright holders.


  • Financial derivatives
  • Hedging
  • Value
  • UK firms
  • Risk management
  • Performance


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