Abstract
PurposeThis study examines the impact of hedging on firm value of Sharīʿah compliant firms (SCFs) in a non-linear framework.Design/methodology/approachThis study employs the system-GMM for dynamic panel data to examine the influence of derivatives usage on firm value (Tobin's Q, ROA and ROE). The sample comprised of 59 non-financial SCFs engaged in derivatives from 2000 to 2017 (18 years). The Sasabuchi-Lind-Mehlum (SLM) test for U-shaped is performed to confirm the existence of the non-linear relationship.FindingsThis study concludes that hedging significantly contributes to firm value of SCFs based on the non-linear framework. This study suggests that, first, the non-linear relationship occurs due to the different degree of derivatives usage and risk. Second, firms practice selective hedging to maintain the upside potential of firm value.Research limitations/implicationsThis study has important implications. First, the importance of risk management via derivatives to increase firm value, second, the evidence of selective hedging from the non-linear relationship between derivatives and firm value and third, the need for quality reporting on derivatives engagement by firms in line with the required accounting standard on derivatives.Originality/valueThis study fills the gap in the literature in relation to the risk management strategies of SCFs in three aspects. First, re-examines the relationship using recent data. Second, examines the relationship in the non-linear framework as the limited studies found in the literature on Malaysian firms are only based on linear relationship. Third, determines whether hedging undertaken by firms is optimal as this can only be addressed using the non-linear framework. This study is robust to the various definitions of firm value (Tobin's Q, ROA and ROE) and non-linear methodologies.
Highlights
Risk management practices undertaken by firms are meant to reduce risk
The current study focuses on the impact of hedging using foreign currency derivatives (FCDs) and firm value which has limited discussion and empirical evidence in the context of Islamic finance
Centered on the above arguments, this study is motivated based on first; there is a lack of empirical evidence on the non-linear relationship between the derivatives and firm value especially on Islamic hedging practices
Summary
Risk management practices undertaken by firms are meant to reduce risk. Understanding the most critical risks facing the firms enables stakeholders especially managers to carry out the necessary measures to mitigate the adverse consequence of risk on firm value. Centered on the above arguments, this study is motivated based on first; there is a lack of empirical evidence on the non-linear relationship between the derivatives and firm value especially on Islamic hedging practices. This study analyses the non-linear relationship between the SCFs that engaged in derivatives and its firm value, where Islamic hedging is still limited because of the lack of awareness on Islamic hedging and poor documentation of Islamic hedging in annual reports of firms (Mohamad et al, 2014). Bartram et al (2011) found a positive relationship between the use of derivatives and firm value They examined the effect of hedging on risk and value among non-financial firms from 47 countries and found evidence on the value relevance issue. Data on FCD are manually collected from the annual reports of the firms
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