The effect of hedging on firm value and performance: Evidence from the nonfinancial UK firms

We examine the effect of hedging with financial derivatives on firm value and financial performance, relying on a new dataset which comprises information on 288 nonfinancial firms listed in the FTSE-All share index at the London Stock Exchange (LSE) over the time period of 2005-2012. We focus on the hedging of the foreign exchange, interest rate and commodity price risks with futures, forward, option and swap contracts. Our findings show that the effectiveness of the risk management practices varies significantly across the financial risks and the derivative used for hedging. For instance, we find that the relationship between interest rate risk hedging and firm financial performance is negative for the overall hedging but positive for the hedging with forward contracts. Some of our results contradict previous findings reported in the literature which suggest that there is a positive association between hedging and firm value and financial performance. Also, we find that the 2008-2009 financial crisis did not affect significantly the established risk management practices and firm’s commitment to financial risk hedging with derivatives