Why Do Firms Hedge Selectively? Evidence from the Gold Mining Industry

Abstract

We examine why firms hedge selectively, i.e., incorporate their market views into their hedging strategies. We find that firms, which are ex ante less likely to be informed about market conditions speculate more than firms that are more likely to be more informed, and firms with a higher probability of bankruptcy speculate more than firms with a lower probability of bankruptcy. These findings contradict theories of selective hedging based on information and financial strength, but are consistent with agency-theoretic or financial constraints explanations. We also find that selective hedging is negatively correlated with managerial stock and stock option holdings, which refutes the possibility that convexity in managerial compensation packages is a motive for managers to speculate. Finally, firms with smaller boards and more outside directors are also less likely to speculate.