Non-linear relationship between foreign currency derivatives and firm value: evidence on Shari'ah compliant firms

Abstract

This study examines the impact of hedging on firm value of Shari'ah compliant firms (SCFs) in a non-linear framework. This study employs the system-GMM for dynamic panel data to examin the influence of derivativs uasge on firm value (Tobin's Q, ROA and ROE). The sample comprised of 59 non-financial SCFs engaged in derivatives from 2000 to 2017 (18 years). The Sasabuchi-Lind-Mehlum (SLM) test for U-shaped is performed to confirm the existence of the non-linear relationship. This study concludes that hedging significantly contributes to firm value of SCFs based on the non-linear framework. This study suggests that, first, the non-linear relationship occurs due to the different degree of derivatives usage and risk. Second, firms practice selective hedging to maintain the upside potential of firm value.