Financial Hedging On Firm Value And Performance In Sector - 13750 Words

The Impacts Of Financial Hedging On Firm Value And Performance In The Ict Sector (Dissertation Sample) Content: THE IMPACTS OF FINANCIAL HEDGING ON FIRM VALUE AND PERFORMANCE IN THE ICT SECTORName:Institution:Date:TABLE OF CONTENTSContents Page1: Introduction..................61.1:Guiding Hypothesis........................................................................................................102: Literature Review and Theory..................122.1: The Modigliani and Miller Theorem....122.2: The Theories of Capital Asset Pricing Model (CAPM).132.3: Why Companies hedge ................................................................................................152.3.1: Minimizing the Underinvestment Problem....................152.3.2 Managerial Risk Adversion, Compensation, and Hedging......172.3.3 Debt and Hedging Policies202.3.4 Tax Benefits and Hedging Policies202.4 Summary......313. Methodology......................323.1 Research Approach and St rategy.............................323.2 Data..323.3 Research Procedures....................333.4 Statistical Distributions for Diagnostic Tests..................383.5 Limitation....................404.Results and Analysis..........................................................................................................444.1 Descriptive Statistics.......................................................................................................444.2 Pearson Correlation.........................................................................................................484.3 Ordinary Least Square Result.........................................................................................514.4 Pooled Data Analysis.....................................................................................................534.5 Empirical Findings........................................................................................................554.5.1 Statistical Test...... .......................................................................................................564.5.2 Hedging and Firm Value Using Multivariate Test.....................................................564.5.3 Robustness..................................................................................................................574.6 Analysis of the Findings................................................................................................595 Conclusion, Implications, Limitations and Recommendations........................................625. 1Conclusion.....................................................................................................................625.2 Implications...................................................................................................................625.3 Limitations and Recommendations...............................................................................64List of AbbreviationsFTSE-NASDAQ-SW-SwapsOP- OptionsFO-ForwardsFU-FuturesCM-Commodity priceFX-Foreign exchange rateIR-Interest rateCAPM-Capital Asset Pricing ModelCAPEX- Capital Pricing ExchangeDPS-Dividend Price ShareDW-Durbin-WatsonICT-Information Communication and TechnologyMM-Modigliani and MillerAPV-adjusted present valueFPO-fixed payment obligationsGMM-Generalized Method of MomentsJSE-Johannesburg Stock ExchangeFCD-Foreign Currency DerivativesFASB-Financial Accounting Standards BoardEXECUTIVE SUMMARYStrategic risk management has increased in significance in the past decades, shifting from pure risk mitigation towards value creation. The 2008-09 financial crises have resulted in a new scrutiny to the application of financial derivatives. The financial crisis issues were routed within the unclearly designed US mortgage security whose ratings failed to reflect risk that the holders of mortgage security have undertaken. The objective of the study was to investigate the impacts of financial hedging on firm value and performan ce in the ICT sector. The methodology used in this study is quantitative. The data was gathered from Thomson Reuters Datastream based on ICT companies in FTSE-All Share Index, with similar hand-gathered data from the annual reports between 2011 and 2015. The focus is solely on non-financial companies listed in the New York Stock Exchange and the NASDAQ-because we wanted to avoid scenarios where derivatives are utilized for speculative reasons instead of hedging. Our sample included 100 ICT companies. Using Tobins Q for estimating firm market values and hedging as the control variable, I discovered insignificant evidence that use of hedging has a positive impact on firm value. However, the study found evidence regarding other variables such as profitability, firm size, leverage, and dividend influence firm value.CHAPTER 1. INTRODUCTIONStrategic risk management has increased in significance in the past decades, shifting from pure risk mitigation towards value creation. The 2008-09 fi nancial crises have resulted in a new scrutiny to the application of financial derivatives. The financial crisis issues were rooted within the unclearly designed US mortgage security whose ratings failed to reflect risk that the holders of mortgage security have undertaken. The United States housing collapse brought the financial system on the brink of collapse, causing the unresolved economic downturn. This caused severe damage to the banking industrys reputation and created a perception that financial derivatives could be harmful instruments, supporting Warren Buffets perception that derivatives are mass destruction financial weapons.Nevertheless, the derivatives, which had triggered massive damage in the economic downturns, were those that financial institutions held. With the exception of a few, three nonfinancial companies had effectively dealt with the held derivative securities, thus reinforcing the assertion raised in past literature that non-financial companies utilized der ivatives for hedging.Nonfinancial companies participated in risk management regularly, as documented in annual reports and surveys. Yet, according to Modigliani and Miller (1958) investors may replicate whatever risk management mechanism companies chose to follow and, if so, hedging financial risks was unnecessary. However, theories of risk management (for example, Smith and Stulz, 1985; Bessembinder, 1991; Froot et al., 1993; and Leland, 1998; Allayannis and Weston, 2001; and Carter et al., 2006) advocated that, because of capital market imperfections, using derivatives for strategies of risk management might influence firm value for example, through increment of debt capacity for taking advantage of debt tax-shields, mitigating underinvestment, reduction of financial distress costs and anticipated taxes.In recent years,Aretz and Bartram (2009) offered empirical evidence alongside additional theoretical arguments that were supportive of the notion that hedging might increase firm value. Additionally, there are studies, which reveal that the impact of hedging on firm value is related to the country and dependent on the maturity, debt level and dividend policy, holdings on operating hedging and liquid assets, level of business geographic diversification and firm size, as well as the industry (Bodnar, 2013).With the exception of a few, the literature has emphasized th...