Corporate Hedging Policy Analysis and It’s Impact on Firm Value : An Empirical Study of Indonesian Stock Exchange

Abstract

The purpose of this study is to investigate the relationship between firm value, financial distress, underinvestment cost , economic exposure and corporate hedging with foreign currency derivatives (FCD) for 186 Indonesian companies listed on the Indonesian Stock Exchange (IDX) over the period 2007-2011. Using data from the annual reports, we find strong evidence linking the decison to hedge and the firm value for the overall sample. Data analysis methods using Structural Equation Modelling (SEM) with the program Linear Structural Relationship (LISREL). This research find that foreign currency hedging is positively correlated with the value of firm. The results suggest that while firm size and the exposure to exchange rate through foreign sales are two important factors determining the decision to hedge, the exposure to exchange rate through foreign sales is the sole factor affecting the extent of hedging. Due to positive economic exposure to the value of the company, the study recommends an increased in productivity export company to improve their performance. And also for the industrial sector that using the external financing in foreign currency should implement hedging policy.