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Corporate Hedging Policy and Equity Mispricing
Author(s) -
Lin J. Barry,
Pantzalis Christos,
Park Jung Chul
Publication year - 2010
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.2010.00272.x
Subject(s) - predictability , valuation (finance) , equity (law) , cash flow , transparency (behavior) , stock (firearms) , economics , derivative (finance) , financial economics , monetary economics , business , finance , mechanical engineering , physics , quantum mechanics , political science , law , engineering
We show that firms’ use of derivatives is negatively associated with stock mispricing. This result is consistent with the notion that hedging improves the transparency and predictability of firms’ cash flows resulting in less misvaluation. Furthermore, we show that the negative relationship between mispricing and hedging is particularly strong when market value is below fundamental value, which is consistent with prior evidence that hedging has a positive impact on firm valuation. Finally, we provide evidence that a “spread‐out” hedging policy that entails the use of a variety of derivative contracts can be more effective in reducing mispricing.