Hedging, Speculation and Shareholder Value

We document that firms in the gold mining industry have consistently realized economically significant cash flow gains from their derivatives transactions. We conclude that these cash flows have increased shareholder value since there is no evidence of an offsetting adjustment in firms' systematic risk. This finding contradicts a central assumption in the risk management literature, that derivatives transactions have zero NPV, and highlights an important motive for firms to use derivatives that the literature has hitherto ignored. We find considerable evidence of selective hedging in our sample, but the cash flow gains from selective hedging are small at best.

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