Hedging strategies with financial derivatives on pulp & paper industry

: a quantitative study

Abstract

This work studies the hedging policies of 42 pulp and paper companies in 2014. My focus is on the use of financial derivatives as a hedging strategy to mitigate the commodity risk exposure. Theories of hedging based on market imperfections show that hedging should increase firm´s value by reducing expected taxes, probability of financial distress and the agency costs of debt and equity. To provide evidence on these hypotheses, I collected detailed financial information of the firms included in the sample, to develop two econometric models capable of giving consistent insights, in order to infer which firm´s characteristics are associated to the theoretical hedging incentives and if consequently this hedging decision is connected to higher firm value within this industry. The data suggest that hedger firms have less coverage of fixed claims and have a higher percentage of managerial ownership comparing to the non-hedger firms. Furthermore, I found evidence that there is no advantage for larger firms within this industry to develop hedging strategies to mitigate their commodity risk exposure, not giving support to the argument of economies in scale in hedging. There is also no support for the hedging tax incentive, rejecting the theoretical background that firms hedge in response to tax schedule convexity. Using Tobin´s Q as an approximation for firm value, I found evidence that firms with more growth opportunities in their investment set and with lower levels of debt have higher Tobin´s Q ratios. However, I found evidence that hedging commodity risk within this industry with financial derivatives does not seem to be a value-enhancing strategy for firms.

Date of Award	31 Mar 2017
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Ricardo Cunha (Supervisor)