National Chung Cheng University,National Cheng Kung University
Abstract:
This paper examines the impact of hedging on market pricing future earnings. Using the future earnings response coefficient (FERC) model, we find that the current stock returns of hedging firms reflect more future earnings than does the stock returns of non-hedging firms. Further, hedging firms reflect more information about future cash flows and accruals in current stock returns. The result is robust to various robustness checks, such as controlling for potential omitted variables, separating loss firms from profit firms, and correcting potential endogeneity bias. We interpret these results as suggesting that hedging reduces investor uncertainty on earnings streams and thus enhances the stock market’s ability to anticipate/price the firms’ future earnings. The evidence confirms the informational role that hedging plays in mitigating asymmetric information
