International Finance. Why Hedge? Campbell R. Harvey. Duke University, NBER and Investment Strategy Advisor, Man Group, plc.

Transcription

1 International Finance Why Hedge? Campbell R. Harvey Duke University, NBER and Investment Strategy Advisor, Man Group, plc February 4,

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3 Who Hedges? 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 76% 63% 62% 41% 42% 40% Large: Yes vs. No Rated: Yes vs. No Dividend Payer: Yes vs. No Across the world, large, rated, dividend paying firms (arguably less affected by market imperfections) are significantly more likely to hedge than their small, unrated, non dividend paying counterparts. Source: Inside Corporate Risk Management Bodnar, Giambona, Graham, Harvey (2016) 3

4 Neoclassical View Famous M&M (1958): In the absence of transaction costs and other frictions, hedging can affect the variability of cash flows but not necessarily their expected value. As a result, risk neutral firms do not need to hedge because shareholders can hedge on their own without incurring any additional costs. 4

5 Credit Rationing Hypothesis One of the classic motivations for corporate risk management is the necessity to mitigate the effects of credit rationing on the firm s ability to invest. Risk management helps mitigate the effects of credit rationing because it reduces the volatility of cash flows that can be used to fund investment projects when access to credit is limited. 5

6 Access to Collateral and Hedging Rampini and Viswanathan argue that firms can pledge collateral to lenders to borrow so they can invest in valuable projects or they can pledge collateral to hedging counterparties to set up a risk management program (e.g., a forward hedging program). This tradeoff implies that when the firm needs to finance a new investment project, the financing need prevails over the hedging concern. Therefore, we should expect financially constrained firms with low collateral capacity to be less likely to rely on risk management relative to financially constrained companies with high collateral capacity. Risk management helps mitigate the effects of credit rationing because it reduces the volatility of cash flows that can be used to fund investment projects when access to credit is limited. 6

7 Access to Collateral and Hedging Panel B1: By Cash Holdings Overall Large firms Small firms Small Large High Investment Prospects Risk Management *** High Cash Holdings *** Low Cash Holdings ** Diff. Low High Cash ***=1% level, **=5% level, *=10% level Bodnar, Graham, Harvey, Giambona (2015) 7

8 Access to Collateral and Hedging Panel B1: By Cash Holdings High Investment Prospects Overall Rated Not Rated Small Large Risk Management *** High Cash Holdings ** Low Cash Holdings ** Diff. Low High Cash ***=1% level, **=5% level, *=10% level Bodnar, Graham, Harvey, Giambona (2015) 8

9 Agency Problems Given that managerial claims to the firm are not easily diversifiable, risk averse managers can reduce the effect of the non diversifiable risk of their claims by hedging, even when this decision is not maximizing value from the perspective of well diversified shareholders. For example, executives in the oil industry could reduce their personal exposure to oil price fluctuations by selling oil price forward contracts as a part of their firm s hedging program. 9

10 Information Asymmetry When it is difficult for outsiders to assess the quality of the management, higher quality managers can signal their type by hedging. The argument is that firm performance depends on managerial ability and other contingencies that are not directly controllable by management (e.g., currency fluctuations). In the presence of information asymmetry, outsiders cannot separate managerial ability from external contingencies. Higher ability managers hedge to mitigate the effect of hedgeable risks on firm performance and signal their type. Lower ability managers do not hedge because having a risk management program is costly. 10

11 Evidence Bodnar, Giambona, Graham and Harvey (2015) administer psychometric tests of risk managers. Only the Agency Theory has a role for risk aversion 11

12 Evidence Suppose you are the only income earner in your family. Your current income is $X. Your doctor recommends that you move because of allergies. Which of the following two job opportunities would you prefer? (1) 100% chance job pays $X for life; (2) 50% chance job pays $2X for life and 50% chance job pays $2/3 X for life. If the CFO chose (1), then the respondent is asked to answer the following follow up question: Which of the following two job opportunities would you prefer? (3) 100% chance job pays $X for life; (4) 50% chance job pays $2X for life and 50% chance job pays $4/5 X for life. If the CFO chose (2), then the respondent is asked to answer the following follow up question: Which of the following two job opportunities would you prefer? (5) 100% chance job pays $X for life; (6) 50% chance job pays $2X for life and 50% chance job pays $1/2 X for life. We categorize the CFOs that picked the sequence (1) and (3) as Highly Risk Averse 12

13 Evidence Highly Risk Averse 0.09 Large 0.22 Ratings 0.11 Dividend Payer 0.08 Investment Prospects 0.08 Profitable 0.10 Credit Line 0.05 Cash Holdings 0.03 Leverage 0.00 Public

14 The Bottom Line None of these theories completely explain what is going on. The truth probably depends on the specific situation at the firm and the particular managers Subject of on going research 14