Is Corporate Hedging Consistent with Value-Maximization in Emerging Markets? An Empirical Analysis of Indian Firms

Vandana Rao Daka and Sankarshan Basu

In this paper, the relation between hedging and leverage is studied using Indian firm data in the period 2002-2013 as the growth of Indian derivative markets has been rapid during this period following the economic liberalization. The analysis is carried out using a two-stage instrumental variable regression framework. The results show that hedging with derivatives allows firms to increase their debt ratio which results in a higher level of leverage leading to higher firm value from tax shields and are consistent with prior literature.