Strategy of Derivatives Hedging: Maintaining and Increasing Firm Value amidst Market Volatility in Indonesia
Evidence from Indonesian
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Keywords:
Hedging, Derivative, Firm Value, Risk Management
Abstract
This study examines the relationship of derivative hedging and firm value. With 1520 observations from 380 Indonesian non-financial firms. The research method used is quantitative explanatory with regression analysis panel data. We involved eight control variables to adjust the influence of external factors. We found that the application of derivative hedging strategies contributes to an increase in the firm value through risk reduction. We also found that commodity derivatives and currency derivatives play a more active role as risk tools than interest rate derivatives. In the context of economic uncertainty and high market fluctuations, firms are exposed to various financial risks, including currency and commodity risks. By implementing an effective hedging strategy, the firm can reduce cash flow volatility and increase financial stability. In addition, reducing uncertainty through risk management can improve investor perception and lower the cost of capital. This result is in line with the principle of Modigliani & Miller (1958) that the firm value is determined by the resulting cash flow. Thus, the practice of risk management is not only relevant but can also reinforce the propositions of Modigliani & Miller (1958) in a more realistic and specific context. The findings underscore the importance of proactive risk management in the face of dynamic market challenges. In addition, this study provides new insights into hedging practices in developing countries. With a better understanding of the impact of using derivatives, firms can manage risk more efficiently and increase their attractiveness in the eyes of investors. So that firm managers can plan the use of derivative instruments as an effective hedging strategy.
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References
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Allayannis, G., & Weston, J. P. (2001). The Use of Foreign Currency Derivatives and Firm Market Value. Review of Financial Studies, 14(1), 243–276. https://doi.org/10.1093/rfs/14.1.243
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Chowdhury, R., Doukas, J. A., & Mandal, S. (2023). CEO risk preferences, hedging intensity, and firm value. Journal of International Money and Finance, 130, 102751. https://doi.org/10.1016/j.jimonfin.2022.102751
Chung, K. H., & Pruitt, S. W. (1994). A Simple Approximation of Tobin’s Q. Financial Management, 23(3), 70. https://doi.org/10.2307/3665623
Das, J. P., & Kumar, S. (2023). The dynamic effect of corporate financial hedging on firm value: The case of Indian MNCs. Borsa Istanbul Review, 23(3), 696–708. https://doi.org/10.1016/j.bir.2023.01.010
Fauver, L., & Naranjo, A. (2010). Derivative usage and firm value: The influence of agency costs and monitoring problems. Journal of Corporate Finance, 16(5), 719–735. https://doi.org/10.1016/j.jcorpfin.2010.09.001
Geczy, C., Minton, B. A., & Schrand, C. (1997). Why Firms Use Currency Derivatives. The Journal of Finance, 52(4), 1323. https://doi.org/10.2307/2329438
Geyer-Klingeberg, J., Hang, M., & Rathgeber, A. (2021). Corporate financial hedging and firm value: A meta-analysis. The European Journal of Finance, 27(6), 461–485. https://doi.org/10.1080/1351847X.2020.1816559
Giraldo-Prieto, C. A., González Uribe, G. J., Vesga Bermejo, C., & Ferreira Herrera, D. C. (2017). Financial hedging with derivatives and its impact on the Colombian market value for listed companies. Contaduría y Administración, 62(5), 1572–1590. https://doi.org/10.1016/j.cya.2017.04.009
Guay, W., & Kothari, S. P. (2003). How much do firms hedge with derivatives? Journal of Financial Economics, 70(3), 423–461. https://doi.org/10.1016/S0304-405X(03)00179-X
Hahn, J., Liao, Z., Ridder, G., & Shi, R. (2023). The influence function of semiparametric two-step estimators with estimated control variables. Economics Letters, 231, 111277. https://doi.org/10.1016/j.econlet.2023.111277
Hsiao, C. (2007). Panel data analysis—Advantages and challenges. TEST, 16(1), 1–22. https://doi.org/10.1007/s11749-007-0046-x
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
Ji, P., & Wei, L. (2023). Hedging with derivatives to increase firm value. Finance Research Letters, 55, 103981. https://doi.org/10.1016/j.frl.2023.103981
Jin, Y., & Jorion, P. (2006). Firm Value and Hedging: Evidence from U.S. Oil and Gas Producers. The Journal of Finance, 61(2), 893–919. https://doi.org/10.1111/j.1540-6261.2006.00858.x
Johnson, S. A. (2003). Debt Maturity and the Effects of Growth Opportunities and Liquidity Risk on Leverage. The Review of Financial Studies, 16(1), 209–236.
Krause, T. A., & Tse, Y. (2016). Risk management and firm value: Recent theory and evidence. International Journal of Accounting and Information Management, 24(1), 56–81. https://doi.org/10.1108/IJAIM-05-2015-0027
Kuzmina, O., & Kuznetsova, O. (2018). Operational and financial hedging: Evidence from export and import behavior. Journal of Corporate Finance, 48, 109–121. https://doi.org/10.1016/j.jcorpfin.2017.10.009
Lang, L. H. P., & Stulz, R. M. (1994). Tobin’s Q, Corporate Diversification, and Firm Performance. Journal of Political Economy, 102(6), 1248–1280.
Lau, C. K. (2016). How corporate derivatives use impact firm performance? Pacific-Basin Finance Journal, 40, 102–114. https://doi.org/10.1016/j.pacfin.2016.10.001
Li, S., Zhang, H., & Liang, Y. (2024). Controlled variable selection with nonconvex regularization for identifying biomarkers. Biomedical Signal Processing and Control, 91, 105965. https://doi.org/10.1016/j.bspc.2024.105965
Luo, H. (Robin), & Wang, R. (2018). Foreign currency risk hedging and firm value in China. Journal of Multinational Financial Management, 47–48, 129–143. https://doi.org/10.1016/j.mulfin.2018.11.002
McNamara, T., Pandey, A., Agarwal, A., & Pileggi, L. (2022). Two-stage homotopy method to incorporate discrete control variables into AC-OPF. Electric Power Systems Research, 212, 108283. https://doi.org/10.1016/j.epsr.2022.108283
Modigliani, F., & Miller, M. H. M. R. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. The American Economic Review, 48(3), 261–297.
Morck, R., Shleifer, A., & Vishny, R. W. (1988). Management ownership and market valuation. Journal of Financial Economics, 20, 293–315. https://doi.org/10.1016/0304-405X(88)90048-7
Panaretou, A. (2014). Corporate risk management and firm value: Evidence from the UK market. The European Journal of Finance, 20(12), 1161–1186. https://doi.org/10.1080/1351847X.2013.766625
Pérez‐González, F., & Yun, H. (2013). Risk Management and Firm Value: Evidence from Weather Derivatives. The Journal of Finance, 68(5), 2143–2176. https://doi.org/10.1111/jofi.12061
Richards, V. D., & Laughlin, E. J. (1980). A Cash Conversion Cycle Approach to Liquidity Analysis. Financial Management, 9(1), 32. https://doi.org/10.2307/3665310
Saeidi, P., Saeidi, S. P., Gutierrez, L., Streimikiene, D., Alrasheedi, M., Saeidi, S. P., & Mardani, A. (2021). The influence of enterprise risk management on firm performance with the moderating effect of intellectual capital dimensions. Economic Research-Ekonomska Istraživanja, 34(1), 122–151. https://doi.org/10.1080/1331677X.2020.1776140
Smith, C. W., & Stulz, R. M. (1985). The Determinants of Firms’ Hedging Policies. The Journal of Financial and Quantitative Analysis, 20(4), 391. https://doi.org/10.2307/2330757
Spence, M. (1973). Job Market Signaling. The Quarterly Journal of Economics, 87(3), 355. https://doi.org/10.2307/1882010
Sugeng, B. (2022). FUNDAMENTAL METODOLOGI PENELITIAN KUANTITATIF (EKSPLANATIF). Deepublish. https://www.shutterstock.com
Tessema, A. M. (2016). Mandatory hedging disclosure and risk management activities: The impact of product market competition. International Journal of Accounting & Information Management, 24(1), 82–89.
Titman, S., & Wessels, R. (1988). The Determinants of Capital Structure Choice. The Journal of Finance, 43(1), 1–19. https://doi.org/10.1111/j.1540-6261.1988.tb02585.x
Ullah, S., Irfan, M., Kim, J. R., & Ullah, F. (2023). Capital expenditures, corporate hedging and firm value. The Quarterly Review of Economics and Finance, 87, 360–366. https://doi.org/10.1016/j.qref.2021.06.008
Zhou, C., Wang, S., Su, H., Tang, X., Cao, Y., & Yang, S.-H. (2024). Dynamic controlled variables based dynamic self-optimizing control. Journal of Process Control, 138, 103228. https://doi.org/10.1016/j.jprocont.2024.103228
Akerlof, G. A. (1970). The Market for “Lemons”: Quality Uncertainty and the Market Mechanism. The Quarterly Journal of Economics, 84(3), 488. https://doi.org/10.2307/1879431
Alam, N., & Gupta, A. (2018). Does hedging enhance firm value in good and bad times. International Journal of Accounting & Information Management, 26(1), 132–152. https://doi.org/10.1108/IJAIM-03-2017-0041
Allayannis, G., Lel, U., & Miller, D. P. (2012). The use of foreign currency derivatives, corporate governance, and firm value around the world. Journal of International Economics, 87(1), 65–79. https://doi.org/10.1016/j.jinteco.2011.12.003
Allayannis, G., & Weston, J. P. (2001). The Use of Foreign Currency Derivatives and Firm Market Value. Review of Financial Studies, 14(1), 243–276. https://doi.org/10.1093/rfs/14.1.243
Anton, S. G., & Nucu, A. E. A. (2020). Enterprise Risk Management: A Literature Review and Agenda for Future Research. Journal of Risk and Financial Management, 13(11), 281. https://doi.org/10.3390/jrfm13110281
Aretz, K., Bartram, S. M., & Dufey, G. (2007). Why hedge? Rationales for corporate hedging and value implications. The Journal of Risk Finance, 8(5), 434–449. https://doi.org/10.1108/15265940710834735
Ayturk, Y., Gurbuz, A. O., & Yanik, S. (2016). Corporate derivatives use and firm value: Evidence from Turkey. Borsa Istanbul Review, 16(2), 108–120. https://doi.org/10.1016/j.bir.2016.02.001
Bachiller, P., Boubaker, S., & Mefteh-Wali, S. (2021). Financial derivatives and firm value: What have we learned? Finance Research Letters, 39, 101573. https://doi.org/10.1016/j.frl.2020.101573
Bartram, S. M. (2019). Corporate hedging and speculation with derivatives. Journal of Corporate Finance, 57, 9–34. https://doi.org/10.1016/j.jcorpfin.2017.09.023
Bartram, S. M., Brown, G. W., & Conrad, J. (2011). The Effects of Derivatives on Firm Risk and Value. Journal of Financial and Quantitative Analysis, 46(4), 967–999. https://doi.org/10.1017/S0022109011000275
Bartram, S. M., Brown, G. W., & Fehle, F. R. (2009). International Evidence on Financial Derivatives Usage. Financial Management, 38(1), 185–206.
Bodnar, G. M., Hayt, G. S., & Marston, R. C. (1998). 1998 Wharton Survey of Financial Risk Management by US Non-Financial Firms. Financial Management, 27(4), 70. https://doi.org/10.2307/3666414
Butt, M. N., Baig, A. S., & Seyyed, F. J. (2023). Tobin’s Q approximation as a metric of firm performance: An empirical evaluation. Journal of Strategic Marketing, 31(3), 532–548. https://doi.org/10.1080/0965254X.2021.1947875
Carroll, A., O’Brien, F., & Ryan, J. (2017). An Examination of European Firms’ Derivatives Usage: The Importance of Model Selection. European Financial Management, 23(4), 648–690. https://doi.org/10.1111/eufm.12115
Carter, D. A., Rogers, D. A., & Simkins, B. J. (2006). Does Hedging Affect Firm Value? Evidence from the US Airline Industry. Financial Management, 35(1), 53–86. https://doi.org/10.1111/j.1755-053X.2006.tb00131.x
Choi, S., Salam, Md. A., & Kim, Y. (2021). Foreign currency derivative usage and firm value in Bangladesh: Comparative analysis between exporters and non-exporters under exchange rate movements. International Journal of Emerging Markets, 16(8), 2070–20921. https://doi.org/10.1108/IJOEM-08-2019-0641
Chowdhury, R., Doukas, J. A., & Mandal, S. (2023). CEO risk preferences, hedging intensity, and firm value. Journal of International Money and Finance, 130, 102751. https://doi.org/10.1016/j.jimonfin.2022.102751
Chung, K. H., & Pruitt, S. W. (1994). A Simple Approximation of Tobin’s Q. Financial Management, 23(3), 70. https://doi.org/10.2307/3665623
Das, J. P., & Kumar, S. (2023). The dynamic effect of corporate financial hedging on firm value: The case of Indian MNCs. Borsa Istanbul Review, 23(3), 696–708. https://doi.org/10.1016/j.bir.2023.01.010
Fauver, L., & Naranjo, A. (2010). Derivative usage and firm value: The influence of agency costs and monitoring problems. Journal of Corporate Finance, 16(5), 719–735. https://doi.org/10.1016/j.jcorpfin.2010.09.001
Geczy, C., Minton, B. A., & Schrand, C. (1997). Why Firms Use Currency Derivatives. The Journal of Finance, 52(4), 1323. https://doi.org/10.2307/2329438
Geyer-Klingeberg, J., Hang, M., & Rathgeber, A. (2021). Corporate financial hedging and firm value: A meta-analysis. The European Journal of Finance, 27(6), 461–485. https://doi.org/10.1080/1351847X.2020.1816559
Giraldo-Prieto, C. A., González Uribe, G. J., Vesga Bermejo, C., & Ferreira Herrera, D. C. (2017). Financial hedging with derivatives and its impact on the Colombian market value for listed companies. Contaduría y Administración, 62(5), 1572–1590. https://doi.org/10.1016/j.cya.2017.04.009
Guay, W., & Kothari, S. P. (2003). How much do firms hedge with derivatives? Journal of Financial Economics, 70(3), 423–461. https://doi.org/10.1016/S0304-405X(03)00179-X
Hahn, J., Liao, Z., Ridder, G., & Shi, R. (2023). The influence function of semiparametric two-step estimators with estimated control variables. Economics Letters, 231, 111277. https://doi.org/10.1016/j.econlet.2023.111277
Hsiao, C. (2007). Panel data analysis—Advantages and challenges. TEST, 16(1), 1–22. https://doi.org/10.1007/s11749-007-0046-x
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
Ji, P., & Wei, L. (2023). Hedging with derivatives to increase firm value. Finance Research Letters, 55, 103981. https://doi.org/10.1016/j.frl.2023.103981
Jin, Y., & Jorion, P. (2006). Firm Value and Hedging: Evidence from U.S. Oil and Gas Producers. The Journal of Finance, 61(2), 893–919. https://doi.org/10.1111/j.1540-6261.2006.00858.x
Johnson, S. A. (2003). Debt Maturity and the Effects of Growth Opportunities and Liquidity Risk on Leverage. The Review of Financial Studies, 16(1), 209–236.
Krause, T. A., & Tse, Y. (2016). Risk management and firm value: Recent theory and evidence. International Journal of Accounting and Information Management, 24(1), 56–81. https://doi.org/10.1108/IJAIM-05-2015-0027
Kuzmina, O., & Kuznetsova, O. (2018). Operational and financial hedging: Evidence from export and import behavior. Journal of Corporate Finance, 48, 109–121. https://doi.org/10.1016/j.jcorpfin.2017.10.009
Lang, L. H. P., & Stulz, R. M. (1994). Tobin’s Q, Corporate Diversification, and Firm Performance. Journal of Political Economy, 102(6), 1248–1280.
Lau, C. K. (2016). How corporate derivatives use impact firm performance? Pacific-Basin Finance Journal, 40, 102–114. https://doi.org/10.1016/j.pacfin.2016.10.001
Li, S., Zhang, H., & Liang, Y. (2024). Controlled variable selection with nonconvex regularization for identifying biomarkers. Biomedical Signal Processing and Control, 91, 105965. https://doi.org/10.1016/j.bspc.2024.105965
Luo, H. (Robin), & Wang, R. (2018). Foreign currency risk hedging and firm value in China. Journal of Multinational Financial Management, 47–48, 129–143. https://doi.org/10.1016/j.mulfin.2018.11.002
McNamara, T., Pandey, A., Agarwal, A., & Pileggi, L. (2022). Two-stage homotopy method to incorporate discrete control variables into AC-OPF. Electric Power Systems Research, 212, 108283. https://doi.org/10.1016/j.epsr.2022.108283
Modigliani, F., & Miller, M. H. M. R. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. The American Economic Review, 48(3), 261–297.
Morck, R., Shleifer, A., & Vishny, R. W. (1988). Management ownership and market valuation. Journal of Financial Economics, 20, 293–315. https://doi.org/10.1016/0304-405X(88)90048-7
Panaretou, A. (2014). Corporate risk management and firm value: Evidence from the UK market. The European Journal of Finance, 20(12), 1161–1186. https://doi.org/10.1080/1351847X.2013.766625
Pérez‐González, F., & Yun, H. (2013). Risk Management and Firm Value: Evidence from Weather Derivatives. The Journal of Finance, 68(5), 2143–2176. https://doi.org/10.1111/jofi.12061
Richards, V. D., & Laughlin, E. J. (1980). A Cash Conversion Cycle Approach to Liquidity Analysis. Financial Management, 9(1), 32. https://doi.org/10.2307/3665310
Saeidi, P., Saeidi, S. P., Gutierrez, L., Streimikiene, D., Alrasheedi, M., Saeidi, S. P., & Mardani, A. (2021). The influence of enterprise risk management on firm performance with the moderating effect of intellectual capital dimensions. Economic Research-Ekonomska Istraživanja, 34(1), 122–151. https://doi.org/10.1080/1331677X.2020.1776140
Smith, C. W., & Stulz, R. M. (1985). The Determinants of Firms’ Hedging Policies. The Journal of Financial and Quantitative Analysis, 20(4), 391. https://doi.org/10.2307/2330757
Spence, M. (1973). Job Market Signaling. The Quarterly Journal of Economics, 87(3), 355. https://doi.org/10.2307/1882010
Sugeng, B. (2022). FUNDAMENTAL METODOLOGI PENELITIAN KUANTITATIF (EKSPLANATIF). Deepublish. https://www.shutterstock.com
Tessema, A. M. (2016). Mandatory hedging disclosure and risk management activities: The impact of product market competition. International Journal of Accounting & Information Management, 24(1), 82–89.
Titman, S., & Wessels, R. (1988). The Determinants of Capital Structure Choice. The Journal of Finance, 43(1), 1–19. https://doi.org/10.1111/j.1540-6261.1988.tb02585.x
Ullah, S., Irfan, M., Kim, J. R., & Ullah, F. (2023). Capital expenditures, corporate hedging and firm value. The Quarterly Review of Economics and Finance, 87, 360–366. https://doi.org/10.1016/j.qref.2021.06.008
Zhou, C., Wang, S., Su, H., Tang, X., Cao, Y., & Yang, S.-H. (2024). Dynamic controlled variables based dynamic self-optimizing control. Journal of Process Control, 138, 103228. https://doi.org/10.1016/j.jprocont.2024.103228
Published
2024-11-05
How to Cite
Purnomo, Heri, Bambang Sugeng, and Puji Handayati. 2024. “Strategy of Derivatives Hedging: Maintaining and Increasing Firm Value Amidst Market Volatility in Indonesia: Evidence from Indonesian”. Shafin: Sharia Finance and Accounting Journal 4 (2), 66-84. https://doi.org/10.19105/sfj.v4i2.15502.
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