We appreciate helpful comments and suggestions from Robert Van Ness (the editor) and Arnold R. Cowan (the former editor), an anonymous referee, and participants at the European Financial Management Association Meeting, Financial Management Association Meeting, Financial Management Association European Conference, and Southern Finance Association Meeting.
Corporate Hedging Policy and Equity Mispricing
Article first published online: 13 JUL 2010
© 2010, The Eastern Finance Association
Volume 45, Issue 3, pages 803–824, August 2010
How to Cite
Lin, J. B., Pantzalis, C. and Park, J. C. (2010), Corporate Hedging Policy and Equity Mispricing. Financial Review, 45: 803–824. doi: 10.1111/j.1540-6288.2010.00272.x
- Issue published online: 13 JUL 2010
- Article first published online: 13 JUL 2010
- financial risk management;
- equity mispricing
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.