Hedging On The Firm Value

Since the reform of the Chinese exchange rate regime started in 2005, RMB adopts the managed floating exchange rate system with the basic of market supply and demand and regulating reference of a basket of currencies. In recent years, China strived to step towards a more market-oriented, flexible exchange rate and the exchange rate of RMB thus has experienced a lot of fluctuations. With the deepening of the market-oriented reform of RMB exchange rate, the exchange rate of RMB will suffer more fluctuations in the future, which will make China’s manufacturing enterprises face increasing exchange rate risks. Manufacturing industry is China’s pillar industry and contributes a lot to export so that exchange rate risk management of manufacturing enterprises is a worthy issue to study. Foreign currency derivatives (FCDs) hedging is an effective way for the corporates to deal with the exchange rate risks. And as a result, this paper explains the impacts of FCDs hedging on the firm value by analyzing the influencing mechanism on basis of hedging theory and making empirical test.This paper firstly reviews the related literatures discussing the relationship between hedging and firm value from the perspective of theoretical and empirical research. It then describes the development and existing issues of China’s FCDs market. It analyzes how hedging influences firm value from the perspective of tax effect and cost effect. This paper establishes multiple regression model on basis of the model in Allayannis&Weston (2001) study and researches on influence factors of firm value. In empirical test, it examine the impacts of hedging rate on firm value founded on the panel data of 457 manufacturing listed companies in China between 2008 and 2014, finding that the FCDs hedging can bring the positive value effect to the manufacturing listed companies.According to empirical result and the existing issues of FCDs market, this paper finally puts forward some policy recommendations on the development of China’s FCDs market and exchange rate risk management of manufacturing enterprises.