Abstract

We adopt Tobit Regressions to examine the hedging behavior of the listed firms in Taiwan during 2005-2009. With the concern of bankruptcy and risk-shifting motivation of the firm, the risk-shifting, risk management, and risk-return-trade-off hypotheses are then reviewed and tested. The results show that return volatility is significantly negative to hedge ratio for distressed firms, controlling for the selection biases, time period of catastrophe (i.e. the Financial Crisis started from 2008), and the model sensitivity to different definitions of financial distress. It strongly supports the risk-shifting phenomenon for distressed firms. Significant negative relationship between hedge ratio and return volatility for non-distress group can also be observed in most tests, apart from some models for the Heckman tests for controlling selection biases. These findings partly support the risk-return-trade-off hypothesis. For the firms being in-between extreme distress levels, the return volatility is positive to hedge ratio, showing a weak support to risk management hypothesis. Our empirical results clarify the impacts of financial distress, return volatility, and their interaction term on corporate hedging behavior.  

Keywords

hedgerisk-shiftingrisk management