The effects of hedging strategies on financial performance of total PLC

Abstract

Reducing corporate risks through hedging strategies has gained prominence with firms in the contemporary globalized market making more imperative the identification and administration of the corporate exposure to sources of risk, such as the foreign exchange rates, interest rates, equity securities and commodity prices. This formed the nexus of the study whose objective was to establish the effect of hedging on firm performance while controlling for firm size, leverage and growth. This study adopted explanatory research design and allowed the researcher to quantitatively through hypothesis testing measure relationships between variables. The study relied solely on quarterly data for the period 2006Q1-2014Q2. This involved integrating financial reports/data as a main procedure to gather accurate, less biased data and increase the quality of data being collected. Correlation analysis, co-integration analysis and error correction were carried out to determine whether there are short run or long run effects of hedging on performance. Findings from correlation analysis revealed that there is a negative and statistically significant relationship between hedging firm performance, (r=-0.5026, pvalue=0.004<0.05). Correspondingly, findings of the ordinary least squares regression analysis showed that there is a very weak negative and statistically significant relationship between hedging and firm performance, (-1.11E-05 p-value=0.01<0.05). In addition, results from cointegration analysis could not confirm long run effect of hedging on firm performance. However, error correction revealed that there is a negative short run effect of hedging on performance. The study concluded that leverage dampen firm performance as funds allocated to trading in derivatives for speculative purposes amount to misapplication of funds from the core business of the company. The study therefore recommends that firms should diversify their leverage strategies and introduce robust and tested econometric and financial models to forecast international oil prices. Further, the study recommends that regulatory authorities should work together in conjunction with industry players to put in place relevant policy, legal and regulatory framework to limit monopolistic tendencies in the international oil market.