The Effect of Agency Costs on Hedging Policy in Indonesian Public Companies

Ekayana Sangkasari Paranita; Elma Muncar Aditya

doi:10.15294/jdm.v11i1.22566

The Effect of Agency Costs on Hedging Policy in Indonesian Public Companies

Ekayana Sangkasari Paranita⁽¹⁾, Elma Muncar Aditya⁽²⁾,

DOI: https://doi.org/10.15294/jdm.v11i1.22566

(1) Universitas Sahid Jakarta
(2) Sekolah Tinggi Ilmu Ekonomi Widya Manggala

Abstract

The purpose of this study is to examine the effect of agency costs on company hedging policies. This study use the concept of hedging policies derived from synchronizing foreign exchange derivatives based on agency theory and hedging with foreign exchange debt based on balancing theory. The novelty of this research is the application of the synthesis of agency theory and balancing theory as indicators of hedging policies. The hedging policy based on foreign exchange derivatives is synchronized with the hedging policy based on foreign debt. The population was companies listed on the Indonesia Stock Exchange (IDX) in 2012-2017. Using the purposive sampling method, 78 companies for each year from 2012 - 2017 were obtained with a total of 468 data. This research used a panel data regression method. The hypotheses were tested with the Hausman Test, which shows the best research model is the Fixed Effect Model. The results of the study concluded that financial distress and underinvestment had a significant positive effect on hedging policies, while business risk did not affect hedging policies because most companies had relatively low foreign sales. The findings of this study have theoretical implications that support agency and balancing theory.

Keywords

Financial Distress, Underinvestment, Business Risk, Hedging Policy.

Full Text:

PDF

References

Aabo, T. (2006). The Importance of Corporate Foreign Debt in Managing Exchange Rate Exposures in Non-Financial Companies. European Financial Management, 12(4), 633-649.

Afza, T., & Alam, A. (2016). Foreign Currency Derivatives and Firm Value. European Online Journal of Natural and Social Sciences, 5(1), 1-14.

Al-Shboul, M., & Alison, S. (2009). The Effectiveness of the Use of Derivatives on the Foreign Exchange Exposure. Journal of Accounting, Business & Management, 16(1), 72-92.

Bartram, S. M., Brown, G. W., & Minton, B. (2010). Resolving the Exposure Puzzle: the Many Facets of Foreign Exchange Exposure. Journal of Financial Economics, 95(2), 148-173.

Belghitar, Y., Clark, E., & Mefteh, S. (2013). Foreign Currency Derivative Use and Shareholder Value. International Review of Financial Analysis, 29(September), 283-293.

Bodroastuti, T., Paranita, E. S., & Ratnasari, L. (2019). Faktor-faktor yang Berpengaruh terhadap Kebijakan Hedging Perusahaan di Indonesia. Valid Jurnal Ilmiah, 16(1), 71-84.

Chanzu, L., & Gekara, M. (2014). Effects of Use of Derivatives on Financial Performance of Companies Listed in the Nairobi Security Exchange. International Journal of Academic Research in Accounting, Finance, and Management Sciences, 4(4), 27-43.

Chaudhry, N., Mehmood, M., & Mehmod, A. (2014). Determinants of Corporate Hedging Policies and Derivaties Usage in Risk Management Practices of Non-Financial Firms. Wulfenia Journal Klagenfurt Austria, 21(7), 293-310.

Clark, E., & Judge, A. (2009). Foreign Currency Derivatives versus Foreign Currency Debt and the Hedging Premium. European Financial Management, 15(3), 606-642.

Clark, E., & Mefteh, S. (2011). Asymmetric Foreign Currency Exposures and Derivatives Use: Evidence from France. Journal of International Financial Management and Accounting, 22(1), 27-45.

Eiteman, D. K., Stonehill, A., & Moffett, M. (2010). Multinational Foreign Exchange Finance (Twelfth Ed). Massachusetts: Pearson Education.

Faisal, M. (2011). Manajemen Keuangan Internasional. Jakarta: Salemba Empat.

Fitriasari, F. (2011). Value Drivers terhadap Nilai Pemegang Saham Perusahaan yang Hedging di Derivatif Valuta Asing. Jurnal Manajemen Bisnis, 1(1), 89-102.

Gay, G., & Nam, J. (2008). The Underinvestment Problem and Corporate Derivatives Use. Financial Management, 27(4), 53-69.

Greene, W. (2013). Econometrics Analysis (Fifth Ed). New Jersey: Prentice Hall International, Inc.

Gujarati, D. (2015). Basic Econometrics (Fourth Ed). New York: Mc. Graw-Hill.

Jensen, C., & Meckling, H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(4), 305-360.

MacMinn, R., & Han, L. (2006). Stock Options and the Corporate Demand for Insurance. The Journal of Risk and Insurance, 73(2), 231-260.

Magee, S. (2009). Foreign Currency Hedging and Firm Value: a Dynamic Panel Approach. Unpublished Thesis. Macquarie University.

Modigliani, M., & Miller, M. (1958). The Cost of Capital, Corporate Finance and Theory of Investment. The American Economic Review, 48(3), 261-297.

Myers, C. (1984). The Capital Structure Puzzle. Journal of Finance, 39(3), 575-592.

Nguyen, N. (2015). Master Programme in Finance Does Hedging Increase Firm Value? an Examination of Swedish Companies. Unpublished Theses. Lund University.

Nuzul, H., & Lautania, M. F. (2015). Pengaruh Leverage, Financial Distress dan Growth Options terhadap Aktivitas Hedging pada Perusahaan Non-Keuangan. Jurnal Dinamika Akuntansi dan Bisnis, 2(2), 104-113.

Paranita, E. S. (2019). Hedging Berbasis Utang Valuta Asing: Studi Kasus pada Perusahaan Terdaftar di Bursa Efek Jakarta. Jakarta: RajaGrafindo Persada.

Robiyanto, R., Wahyudi, S., & Pangestuti, I. R. D. (2017). The Volatility-Variability Hypotheses Testing and Hedging Effectiveness of Precious Metals for the Indonesian and Malaysian Capital Markets. Gadjah Mada International Journal of Business, 19(2), 167-192.

Schiozer, R. F., & Saito, R. (2009). The Determinants of Currency Risk Management in Latin American Nonfinancial Firms. Emerging Markets Finance and Trade, 45(1), 49-71.

SprÄiÄ‡, D. M. (2011). What Determines Derivatives Usage in Large Slovenian Companies?. International Journal of Arts & Sciences, 4(9), 453-476.

Stulz, R. (2013). How Companies Can Use Hedging to Create Shareholder Value. Journal of Applied Corporate Finance, 25(4), 21-29.