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Conference of 2007
Finance Center Münster
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We study the selective hedging puzzle, using quarterly data on the derivatives transactions of a sample of North American gold mining firms. We find that smaller firms speculate more than larger firms, contrary to the hypothesis that larger firms are more likely to possess an information advantage relative to smaller firms and hence should be more likely to speculate. We also find that the extent of selective hedging increases as the probability of bankruptcy (as measured by Altman’s Z-score) rises. Our findings on the relation between managerial incentives and selective hedging provide no support for – indeed contradict – the possibility that managers may be speculating in their own self interest. We find that rewarding managers through common stock and stock options, and also insider ownership of the firm’s shares, actually work to reduce corporate speculation.
Abstract
Why do firms hedge selectively? Evidence from the gold mining industry
Adam, Tim; Fernando, Chitru; Salas, JesusWe study the selective hedging puzzle, using quarterly data on the derivatives transactions of a sample of North American gold mining firms. We find that smaller firms speculate more than larger firms, contrary to the hypothesis that larger firms are more likely to possess an information advantage relative to smaller firms and hence should be more likely to speculate. We also find that the extent of selective hedging increases as the probability of bankruptcy (as measured by Altman’s Z-score) rises. Our findings on the relation between managerial incentives and selective hedging provide no support for – indeed contradict – the possibility that managers may be speculating in their own self interest. We find that rewarding managers through common stock and stock options, and also insider ownership of the firm’s shares, actually work to reduce corporate speculation.