Firm Hedging Decision and Its Value Implication
Type of DegreePhD Dissertation
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In Chapter 1, we study the impact of increased transparency in the reporting of OCI on firms’ foreign currency cash flow hedging practice and the value relevance of this change. We find a reduced level of foreign currency cash flow hedging among firms that experienced the greatest volatility of unrealized hedging gains and losses while reported these items opaquely before mandated increase in transparency. Our results show that cash flow hedging is value relevant only when reported in a more transparent format and that the increase in transparency reduces information asymmetry. Consistent with managers’ fears of investor confusion following additional transparency, we show that investors unsymmetrically incorporate the implications of unrealized hedging gains and losses. In Chapter 2, we find the mandated increase in OCI reporting transparency eliminated the difference between sophisticated and non-sophisticated investors in the usefulness of the information. We also find investors value efforts by managers to reduce translation exposure through net investment hedging and pay greater attention toward translation losses which drives management hedging, particularly when the information is reported transparently. In Chapter 3, I decompose the translation adjustment into temporary and long-term portions. I find that investors are able to distinguish the long-term and temporary components of the translation adjustment, and properly impound only the long-term portion in stock pricing. The results also show that managers adjust their net investment hedging decision based mainly on the long-term translation impact. The transitory/temporary portion has limited impact on either the decision to hedge or level of hedging. I also find that managers are more likely to hedge and hedge more when they face long-term translation losses.