Hedging, financial distress and managerial risk : Evidence from Australia gold mining industry

Authors

Victor Fang
Chien-Ting Lin, Edith Cowan University
Chia-Cheng Ho

Document Type

Other

Publisher

Edith Cowan University

Place of Publication

Joondalup, Western Australia

Faculty

Faculty of Business and Public Management

School

School of Finance and Business Economics

Comments

Fang, V., Lin, C., & Ho, C. (2001). Hedging, financial distress and managerial risk : evidence from Australia gold mining industry. Joondalup, Australia: Edith Cowan University.

Abstract

This study investigates risk management practices in the Australian gold mining industry. We focus on this particular industry because many firms in the sector tend to be in this single business and share a common and clear exposure to gold price volatility. Our sample comes from the listed companies in the gold sector of the Australian Stock Exchange in1997 as the Australia Accounting Standard Board requires firms to disclose their derivative uses since 1997. We first find that the Australian companies tend to be more actively involved in gold derivative markets than their counterparts in North America. This may suggest a general risk-averse attitude among the Australian managers when comparing with the North American counterparts. Furthermore, it may also reflect the fact that Australian managers face more exposures such as exchange rate risk. Second, we find that corporate hedging activities are associated with some of firm characteristics. In contrast to the linear relationship suggested by earlier researchers, we find some empirical support for a non-linear relationship between the possibility of financial distress and hedging levels. High and low cash production costs are found to be associated with low hedging percentage, while medium level cash production cost is associated with high hedging percentage. Finally, we test the relationship between hedging level and cash flow since most surveys report that the primary objective of hedging is to manage cash flows. Evidence is found that hedging percentage is associated with internal cash flow constraints.