Abstract
We examine the information content of corporate hedging announcements using a hand-collected sample of 153 announcements of hedging increases/decreases made by 26 gold mining firms between 1990 and 2008. We study the reaction to the announcements in both the gold and equity markets. We find strong evidence that the gold spot market reacts positively (negatively) to announcements of hedging decreases (increases) by individual firms, and that this reaction is consistent with the announcements conveying valuable information to other market participants about future gold prices rather than being due to a possible market supply impact. Furthermore, we argue that changes in hedging policies appear to stem from changes in firms' expectation of future cash flows. We find that announcements of increases (decreases) in hedging are associated with negative (positive) abnormal returns in the corresponding firm's equity and we also find similar industry-wide contagion effects of hedging announcements. Furthermore, we also document a significant reduction in institutional ownership following hedging increases that imply a negative change in the firm's outlook on gold prices.
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