Does the Use of Foreign Currency Derivatives Affect Colombian Firms Market Value?
The series Working Papers on Economics is published by the Office for Economic Studies at the Banco de la República (Central Bank of Colombia). The works published are provisional, and their authors are fully responsible for the opinions expressed in them, as well as for possible mistakes. The opinions expressed herein are those of the authors and do not necessarily reflect the views of Banco de la República or its Board of Directors.
Classic financial theory relies on the absolute perfection of capital markets, which results in one of the milestones of theoretical corporate finance: the firms value is invariant to the choice of capital structure. As an extension to the aforementioned proposition by Modigliani and Miller (1958), corporate risk management is also futile. Nevertheless, it is clear that capital markets do not work with absolute perfection. There exist frictions which make risk management decisions essential for firms value. Moreover, derivatives market vast importance is a good proxy of the relevance of hedging decisions for corporate finance. There is a remarkable volume of literature which tests the effects of risk management and hedging decisions for the value of the firm, mainly for the US corporate market. However, there is little effort on this subject for markets which work even farther from absolute perfection. This document undertakes such task for the Colombian market. Focused on non-financial firms and the locals most liquid derivatives market, we find that for a panel of eight large Colombian corporations the growth rate of Tobin´s Q depends significantly on firm´s size and hedging. After controlling for relevant financial variables such as firm´s profitability and leverage, and other variables such as firm´s age, results suggest that an increase in hedging leads to a higher growth in firm´s value.
The points of view expressed in the document are those of the authors and do not represent those of the Banco de la República or the Board of Directors. The authors are the only ones responsible for any error in the document.
