مصون سازی، حدس و گمان، و ارزش سهام

We document that gold mining firms have consistently realized economically significant cash flow gains from their derivatives transactions. We conclude that these cash flows have increased shareholder value since there is no evidence of an offsetting adjustment in firms’ systematic risk. This finding contradicts a central assumption in the risk management literature that derivatives transactions have zero net present value, and highlights an important motive for firms to use derivatives that the literature has hitherto ignored. Although we find considerable evidence of selective hedging in our sample, the cash flow gains from selective hedging appear to be small at best.

The above statements are puzzling because the existing theories of corporate hedging assume that the use of derivatives does not itself increase a firm's value. Rather, the use of derivatives is thought to add value by alleviating a variety of market imperfections through hedging. Why, then, do some firms claim that “hedging” (as in the case of Placer Pacific) or “not hedging” (as in the case of Franco-Nevada) can directly enhance their revenues? First, it is possible that managers believe that they can create value for shareholders by incorporating speculative elements into their hedging programs. It is also possible that the pricing of derivatives contracts in some markets gives rise to positive derivatives cash flows. These issues have received little attention in the literature on corporate risk management, possibly due to a lack of adequate firm-specific data on derivatives usage. We address the question of whether using derivatives is intrinsically valuable by examining a unique database that contains quarterly observations on all outstanding gold derivatives positions for a sample of 92 North American gold mining firms from 1989 to 1999.1 This data set allows us to infer and analyze on a quarterly basis over a ten-year period the actual cash flows that stem from each firm's derivatives transactions. We compare the actual cash flows with benchmarks to determine both whether firms make or lose money using derivatives, and what the sources of these gains or losses may be. We find that the firms in our study generate positive cash flows that are highly significant both economically and statistically. Moreover, these positive cash flows are statistically significant in both rising and falling markets. Our sample firms realize an average total cash flow gain of $11 million, or $24 per ounce of gold hedged per year, while their average annual net income is only $3.5 million. The bulk of the cash flow gain appears to stem from persistent positive realized risk premia, i.e., positive spreads between contracted forward prices and realized spot prices. We find no evidence that the use of derivatives has increased the systematic risk for the firms in our sample. These findings imply that firms’ derivatives transactions translate into increases in shareholder value. Furthermore, we find considerable excess volatility in firms’ hedge ratios over time, which is consistent with evidence provided by Dolde (1993) and Bodnar et al. (1998) that managers incorporate their market views into their hedging programs. Stulz (1996) refers to this type of speculation as “selective hedging.” However, we find that the average cash flow gains from selective hedging are small at best. We make two major contributions to the risk management literature. First, we show that a central tenet of hedging theory, that derivatives transactions have zero net present value, can be violated for an extended period. Second, and in contrast to our first contribution, we show that firms do not realize economically significant benefits by trying to time the market through selective hedging. The risk premia that give rise to positive derivatives cash flows can be a potentially important motive for firms to use derivatives. This possibility is not considered in the current literature on corporate risk management. Moreover, by disregarding these cash flows, one obtains an erroneous measurement of the hedging benefits that arise from the alleviation of market imperfections. For example, Allayannis and Weston (2001) show that for a sample of 720 large nonfinancial firms, the use of foreign currency derivatives is positively related to firm value. Given our findings, it is not clear whether this value increase stems from the alleviation of market imperfections or from risk premia in forward markets. Our work is related to a recent study by Brown et al. (2002), who find evidence of selective hedging in a sample of 48 firms drawn from three industries (including 44 gold producers). Consistent with our results they find that in their sample the potential economic benefit of selective hedging is quite small. However, they do not analyze the total cash flow effects of derivatives use as we do. Our work is also related to a recent study by Hentschel and Kothari (2001) who find few, if any, measurable differences in the risk exposures of firms that use derivatives and those that do not, and conclude that derivatives usage has no measurable impact on exposure or volatility. In contrast, derivatives users in our sample reduce their one-year gold price exposures by 54% on average, and earn substantial additional cash flows from their derivatives transactions. Finally, our data set and methodology enable a more precise measurement of firms’ derivatives cash flows than has been previously possible. For instance, Allayannis and Mozumdar (2000) infer annual derivatives cash flows from income statements, but their methodology works only for a small number of firms in their sample. Guay and Kothari (2003) use simulation analysis to estimate the cash flows from derivatives transactions of nonfinancial firms. In contrast, we use quarterly observations on firms’ derivatives positions to derive the actual quarterly cash flows that stem from firms’ derivatives activities. Furthermore, the time-series nature of our data set allows us to analyze the hedging behavior of each individual firm in our sample. The rest of our paper is organized as follows. In Section 2 we examine how the existence of risk premia might affect firms’ hedging strategies. Section 3 describes our sample and the data sources. Section 4 presents our evidence on the existence of selective hedging in our sample. Section 5 discusses our findings on the cash flow and value gains from risk premia and selective hedging. Finally, Section 6 concludes.

We examine the basic premise in the risk management literature that derivatives transactions have zero intrinsic net worth. We find that this assumption can be violated over an extended time period. We link the cash flow and value gains from using derivatives to risk premia in derivatives markets, and argue that these risk premia can be a potentially important motive for firms to use derivatives. In contrast, despite considerable evidence that firms try to time the market when they use derivatives, we show that the expected benefits from selective hedging are small at best. Our analysis also provides new insights for future empirical studies aimed at measuring the benefits of derivatives use. There is no ex ante reason to believe that the market and corporate behaviors we identify in this paper are unique to the gold market, especially in view of the large body of literature that documents the presence of risk premia in a wide range of currency and commodity markets. To our knowledge, there has been no previous systematic attempt to study the impact of risk premia on corporate risk management. Thus, our study provides focus for a new and potentially fruitful area of research.