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Does corporate hedging affect firm valuation? Evidence from the IPO market
Author(s) -
Qiao Zheng,
Xia Chongwu,
Zhang Lei
Publication year - 2020
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.22098
Subject(s) - initial public offering , valuation (finance) , endogeneity , volatility (finance) , underwriting , economics , market liquidity , monetary economics , information asymmetry , financial economics , business , econometrics , accounting , finance
Focusing on the IPO market, we examine the influence of corporate hedging on firm valuation. Consistent with the argument that hedging reduces information asymmetry, we find that hedging IPO firms are associated with lower price revisions and underwriting fees. More important, hedging reduces IPO underpricing, especially for informationally opaque firms. This provides strong evidence that corporate hedging increases firm valuation. We also show that corporate hedging lowers aftermarket idiosyncratic volatility, enhances aftermarket liquidity, and improves the long‐term performance of IPO firms. We use both an instrumental variable approach and a regulation change on derivatives supply to address endogeneity concerns.