Why Do Firms Hedge? A Review of the Evidence

The corporate hedging literature has grown rapidly over the last decade, motivated firstly by the development of a theoretical framework and secondly by the availability of public data. Much of the early research in this area sourced data on hedging practices by surveying corporate risk management practitioners, such as corporate treasurers, finance directors and financial managers. Recent developments in accounting standards regulation has resulted in an increase in the quantity of risk management data and an improvement in the quality of data disclosed in financial statements. These developments have acted as a catalyst and facilitated the recent growth in empirical studies. This paper presents a critique of the empirical literature on corporate hedging. The existing evidence provides mixed support for the theories of hedging. The paper argues that the lack of a general consensus might be due to biases in the samples of some studies or that country specific institutional factors play an important role. Whichever it is, one thing is certain, existing research has only touched the surface and many unresolved issues remain