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Corporate risk management and firm value: evidence from the UK market

Research output: Contribution to journalJournal article

Published

Journal publication date12/2014
JournalEuropean Journal of Finance
Journal number12
Volume20
Number of pages26
Pages1161-1186
Early online date14/03/13
Original languageEnglish

Abstract

The paper evaluates the effect of corporate risk management activities on firm value, using a sample of large UK non-financial firms. Following recent changes in financial reporting standards, we are able to collect detailed information on risk management activities from audited financial reports. This enables us to gain a better understanding of risk management practices and to investigate value implications of different types of hedging. Overall 86.88% of the firms in the sample use derivatives to manage at least one type of price risk. The hedging premium is statistically and economically significant for foreign currency derivative users, while we provide weak evidence that interest rate hedging increases firm value. The extent of hedging and the hedging horizon have an impact on the hedging premium, whereas operational risk management activities do not significantly influence the market value of the firm.