Using data collected from the annual statements of 571 life insurers, separate models are estimated for the probability and degree of use of futures and options by life insurers for the purpose of hedging economic risk. The results support the informational economies hypothesis, the bankruptcy costs and underinvestment hypotheses, and the managerial discretion hypothesis. The results also suggest that an insurer's matching of asset and liability durations (on-balance-sheet hedging) serves as a substitute for hedging with futures and options (off-balance-sheet hedging) and that the use of reinsurance serves as a signal for those firms that are predisposed to hedging firm risk.

The willingness of a firm to hedge its activities is difficult to measure. A single indicator for the use of derivatives or even the notional or fair value of its hedging positions have been shown to entail limitations. In this paper, we introduce a new measure based on the number of risks hedged. From the US EDGAR database, we extract information on the hedging activity in four types of risks: interest rate, currency, commodity and equity. This allows us to better test the theoretical determinants of hedging. In a sample of firms from the Samp;P 500 over the period 2001 to 2005, we study the hedging behavior by industry and type of risk. While we confirm that leverage, foreign sales and size are the main empirical determinants for corporate hedging, we find significant variations across industries. We also provide empirical support for other determinants such as dividend policy, liquidity, tax credits, growth opportunities and managerial shareholdings. Confirming Adam, Dasgupta and Titman (2007) prediction, we observe that hedging policy heterogeneity is positively related to the competitive structure of the industry.

This paper employs meta-analysis to aggregate and systematically analyze the mixed empirical evidence on the determinants of corporate hedging reported in 132 previously published studies covering data from more than 73,000 firms. Among the fourteen proxy variables analyzed by multivariate meta-analysis, three variables emerge as reliable explanatory factors for corporate hedging decisions supporting the bankruptcy and financial distress hypothesis: dividend yield (positive sign), liquidity (negative sign), and size (positive sign). Moreover, for tax-loss carry forwards (positive sign) and research and development (positive sign), our findings indicate a weak impact on corporate hedging behavior reflecting tax reasons, the coordination between financing and investment, and agency conflicts between shareholders and debtholders. Regarding the asymmetric information and agency conflicts of equity hypothesis, we find no explanatory power. The further analysis of heterogeneity via meta-regression reveals several factors that determine the mixed empirical evidence reported in previous studies. First, the results indicate that studies analyzing firms from North America report, on average, a lower impact of leverage on the corporate hedging decision. Moreover, studies examining more recent data samples tend to find a weaker relation between tangible assets and hedging, R&D and hedging respectively. Overall, our results encourage scientific research to put more emphasis on finer-grained examinations of hedging variations and to discover rationales of corporate hedging extending classical financial theories.

Seminar paper from the year 2012 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1, University of Innsbruck, language: English, abstract: This seminar paper deals with three main hedging policies. It is based on the Smith and Stulz (1985) paper "the determinants of firms' hedging policies. Furthermore their results are compared with other scientific papers. At the end, one should be able to get a basic knowledge about hedging and how taxes, debt and managerial behavior can influence different policies.

Derivatives are the major icon among risk management practices. Firms usually use derivatives to hedge their foreign exchange and interest rate risk. This study aims to examine the determinants' of corporate hedging policies and derivative usage in risk management particularly with respect to Pakistan, as the political and economic conditions in Pakistan are highly volatile which intends the corporations to handle and mitigate their risk through channelizing the derivatives. Secondary data of 75 non financial firms listed in Karachi Stock Exchange was collected over the period 2007-2011 - to regress empirically - for achieving the aim of this study. Mann-Whitney U test was used to distinguish the derivative user and non user. Findings of this test characterize users as large size, higher growth opportunities, cash flow volatility, foreign exchange and interest rate exposure. Moreover this study finds that there is a significant relationship between the use of derivatives and foreign purchase, liquidity, firm growth and size. Our findings suggest that derivative users have competitive edge over the non user, as they get economies of scale and proper risk management through using these kinds of derivative instruments.

This paper studies the determinants and the value effects of corporate hedging for 227 Hong Kong and Chinese companies listed on the Hong Kong stock exchange. Using data from disclosures in the annual reports, we find strong evidence linking the decision to hedge and the expected costs of financial distress for the overall sample. The results are stronger for the HK firms than the Chinese firms, perhaps due to the fact that as a major shareholder in most of the Chinese companies, the State is a guarantor of the debt. Our results show a negative relationship between hedging and State ownership. The other determinants of hedging identified in this paper are foreign currency exposure, reflected in levels of foreign sales and foreign debt, economies of scale in derivative hedging costs, and levels of liquidity. We also show that the debt tax benefits of hedging add about 0.88% to the value of HK firms and 0.56% to Chinese firms.

Dealing with all aspects of risk management that have undergone significant innovation in recent years, this book aims at being a reference work in its field. Different to other books on the topic, it addresses the challenges and opportunities facing the different risk management types in banks, insurance companies, and the corporate sector. Due to the rising volatility in the financial markets as well as political and operational risks affecting the business sector in general, capital adequacy rules are equally important for non-financial companies. For the banking sector, the book emphasizes the modifications implied by the Basel II proposal. The volume has been written for academics as well as practitioners, in particular finance specialists. It is unique in bringing together such a wide array of experts and correspondingly offers a complete coverage of recent developments in risk management.