Hedging, Managerial Ownership and Firm Value

Abstract

The study investigates the impact of derivatives as a risk management strategy on the value of Malaysian firms. This study also examines the interaction effect between derivatives and managerial ownership on firm value. This study examines 200 nonfinancial firms engaged in derivatives for the period 2012-2017 using the generalized method of moments (GMM) to establish the influence of derivatives and managerial ownership on firm value. The study refers to two related theories (hedging theory and managerial aversion theory) to explain the findings. Firm value is measured using Tobin's Q with return on asset (ROA) and return on equity (ROE) as a robustness check. The study found evidence on the positive influence of derivatives on firm value as proposed by the hedging theory. However, the study concludes that managers less hedge when they owned more shares based on the negative interaction between derivatives and managerial ownership on firm value. Hedging decision among managers in Malaysian firms therefore does not subscribe to the managerial aversion theory.