The Impacts Of Financial Hedging On Firm Value And Performance In The Ict Sector (Dissertation Sample)

THE IMPACTS OF FINANCIAL HEDGING ON FIRM VALUE AND PERFORMANCE IN THE ICT SECTOR
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TABLE OF CONTENTS
Contents Page
1: Introduction…………………………………………………………………..................6
1.1:Guiding Hypothesis........................................................................................................10
2: Literature Review and Theory………………………………………………..................12
2.1: The Modigliani and Miller Theorem………………………………………………....12
2.2: The Theories of Capital Asset Pricing Model (CAPM)……………………………….13
2.3: Why Companies hedge ................................................................................................15
2.3.1: Minimizing the Underinvestment Problem……………………………....................15
2.3.2 Managerial Risk Adversion, Compensation, and Hedging………………………......17
2.3.3 Debt and Hedging Policies……………………………………………………………20
2.3.4 Tax Benefits and Hedging Policies…………………………………………………20
2.4 Summary……………………………………………………………………………......31
3. Methodology………………………………………………………………......................32
3.1 Research Approach and Strategy…………………………………….............................32
3.2 Data……………………………………………………………………………………..32
3.3 Research Procedures………………………………………………………....................33
3.4 Statistical Distributions for Diagnostic Tests………………………………..................38
3.5 Limitation…………………………………………………………………....................40
4.Results and Analysis..........................................................................................................44
4.1 Descriptive Statistics.......................................................................................................44
4.2 Pearson Correlation.........................................................................................................48
4.3 Ordinary Least Square Result.........................................................................................51
4.4 Pooled Data Analysis.....................................................................................................53
4.5 Empirical Findings........................................................................................................55
4.5.1 Statistical Test.............................................................................................................56
4.5.2 Hedging and Firm Value Using Multivariate Test.....................................................56
4.5.3 Robustness..................................................................................................................57
4.6 Analysis of the Findings................................................................................................59
5 Conclusion, Implications, Limitations and Recommendations........................................62
5. 1Conclusion.....................................................................................................................62
5.2 Implications...................................................................................................................62
5.3 Limitations and Recommendations...............................................................................64
List of Abbreviations
FTSE-
NASDAQ-
SW-Swaps
OP-Options
FO-Forwards
FU-Futures
CM-Commodity price
FX-Foreign exchange rate
IR-Interest rate
CAPM-Capital Asset Pricing Model
CAPEX- Capital Pricing Exchange
DPS-Dividend Price Share
DW-Durbin-Watson
ICT-Information Communication and Technology
M&M-Modigliani and Miller
APV-adjusted present value
FPO-fixed payment obligations
GMM-Generalized Method of Moments
JSE-Johannesburg Stock Exchange
FCD-Foreign Currency Derivatives
FASB-Financial Accounting Standards Board
EXECUTIVE SUMMARY
Strategic risk management has increased in significance in the past decades, shifting from pure risk mitigation towards value creation. The 2008-09 financial crises have resulted in a new scrutiny to the application of financial derivatives. The financial crisis issues were routed within the unclearly designed US mortgage security whose ratings failed to reflect risk that the holders of mortgage security have undertaken. The objective of the study was to investigate the impacts of financial hedging on firm value and performance in the ICT sector. The methodology used in this study is quantitative. The data was gathered from Thomson Reuters Datastream based on ICT companies in FTSE-All Share Index, with similar hand-gathered data from the annual reports between 2011 and 2015. The focus is solely on non-financial companies listed in the New York Stock Exchange and the NASDAQ-because we wanted to avoid scenarios where derivatives are utilized for speculative reasons instead of hedging. Our sample included 100 ICT companies. Using Tobin’s Q for estimating firm market values and hedging as the control variable, I discovered insignificant evidence that use of hedging has a positive impact on firm value. However, the study found evidence regarding other variables such as profitability, firm size, leverage, and dividend influence firm value.
CHAPTER 1. INTRODUCTION
Strategic risk management has increased in significance in the past decades, shifting from pure risk mitigation towards value creation. The 2008-09 financial crises have resulted in a new scrutiny to the application of financial derivatives. The financial crisis issues were rooted within the unclearly designed US mortgage security whose ratings failed to reflect risk that the holders of mortgage security have undertaken. The United States housing collapse brought the financial system on the brink of collapse, causing the unresolved economic downturn. This caused severe damage to the banking industry’s reputation and created a perception that financial derivatives could be harmful instruments, supporting Warren Buffet’s perception that “derivatives are mass destruction financial weapons.
Nevertheless, the derivatives, which had triggered massive damage in the economic downturns, were those that financial institutions held. With the exception of a few, three nonfinancial companies had effectively dealt with the held derivative securities, thus reinforcing the assertion raised in past literature that non-financial companies utilized derivatives for hedging.
Nonfinancial companies participated in risk management regularly, as documented in annual reports and surveys. Yet, according to Modigliani and Miller (1958) investors may replicate whatever risk management mechanism companies chose to follow and, if so, hedging financial risks was unnecessary. However, theories of risk management (for example, Smith and Stulz, 1985; Bessembinder, 1991; Froot et al., 1993; and Leland, 1998; Allayannis and Weston, 2001; and Carter et al., 2006) advocated that, because of capital market imperfections, using derivatives for strategies of risk management might influence firm value – for example, through increment of debt capacity for taking advantage of debt tax-shields, mitigating underinvestment, reduction of financial distress costs and anticipated taxes.
In recent years,Aretz and Bartram (2009) offered empirical evidence alongside additional theoretical arguments that were supportive of the notion that hedging might increase firm value. Additionally, there are studies, which reveal that the impact of hedging on firm value is related to the country and dependent on the maturity, debt level and dividend policy, holdings on operating hedging and liquid assets, level of business geographic diversification and firm size, as well as the industry (Bodnar, 2013).
With the exception of a few, the literature has emphasized th...