Determinants and value relevance of corporate hedging in African firms: The role of institutional context, firms' characteristics, and managerial attributes

Ajibade, Ademola

Abstract

Purpose
African markets remain attractive to investors due to abundant natural resources and growing consumer markets. However, they tend to shy away from the market due to political, regulatory, and micro risks. Besides, there is a lack of in-depth studies on the importance of financial derivative usage in mitigating the risk exposure faced by African companies. Moreover, the impact of country variables on the value relevance of financial derivative use has not received much attention. To address these gaps, this thesis aims to investigate the extent to which country-level institutional factors, firm-specific characteristics, and managerial attributes influence the use of corporate hedging strategies, and to assess the impact of these hedging activities on firm value. The goal is to provide evidence of the financial practices of African companies and the importance of financial derivatives in a market where volatility is high.

Research Design and Methods
From a positivist perspective, this thesis employed a quantitative method, as data on financial derivative use were manually extracted from companies’ annual reports. Thus, the sample of this study comprises 240 listed non-financial companies in Africa (i.e. Botswana, Kenya, Mauritius, Namibia, Nigeria, South Africa, Tanzania, and Uganda), covering the period 2013-2022. Also, several cross-sectional regressions were employed to test for the impact of corruption on corporate hedging practices among companies in Africa.

Findings
Regarding the drivers of corporate hedging practices among African firms, the country variables reveal that country-level corruption and regulatory quality explain corporate risk management decisions. Thus, findings show that African firms have less incentive to hedge against high-level corruption. On the other hand, financial derivatives users in highly corrupt business environments tend to cover all their risk exposure through hedging rather than being selective in their decisions. Also, better governance indices proxied by regulatory qualities, motivate corporate hedging activity in Africa but propel users to be selective in their hedging activity. Furthermore, for firm-specific variables, the findings revealed that African companies with poor liquidity positions, as proxied by the current ratio, are more inclined to hedge to avoid financial distress costs. In addition, these firms with low liquidity hedge all their exposure rather than being selective in their decisions. Besides, companies with growth opportunities have an incentive to hedge to avoid underinvestment costs.

Regarding managerial attributes, education is found to predict corporate hedging decisions. The level of educational attainment explains hedge use among firms in Africa as it reveals a negative relationship between CEOs with PhD qualifications and corporate hedging decisions. However, African CEOs with foreign business degrees from elite foreign institutions have incentives to use financial derivatives. On the other hand, the thesis did not find statistical evidence to support the relationship between age and hedge use decisions.

The test result for the value implication of financial derivatives use shows a negative relationship between the use of financial derivatives and firm value. However, the analysis of the moderating effect of corruption on the value implications of financial derivatives usage shows a positive relationship between derivative use and firm value. Also, an analysis of the types of derivative instruments that improve firm value was largely mixed. As findings show strong evidence for using futures to hedge FX risk and firm value, but a negative relationship between swaps and firm value. On the other hand, it was found that using futures to hedge CP risk exposure reduces firm value.

Implications of the Research
The findings of this thesis are useful to managers and stakeholders as they provide valuable insight into the understanding of variables that inform corporate risk management design. Thus, this study challenges the popular assumptions that corporate hedging is often beneficial, rather than being context-dependent. The findings of this thesis show that traditional theories may not fully apply in the emerging economies without adjustment to local realities.

Consequently, based on the findings of this study, companies in Africa could benefit from their risk management portfolio by integrating a broader financial governance structure into their hedging strategies.

Also, the board of directors could find the results of the educational background and the exposure of Chief Executive Officers (CEO) useful in the recruitment and appointment of senior executives.
Also, the results in the thesis stress the need for investors to be wary of the institutional context when evaluating companies’ hedging programs. Moreover, analysts could focus on the type of hedging instruments employed by businesses in Africa and the demographics of CEOs to predict the efficacy and intent of hedging practice among African firms. This could inform the market’s judgement about managerial and organisational performance. In the same fashion, financial consultants in Africa could use the results of this research to offer recommendations on hedging programs based on the quality of the external environment, leadership attributes and liquidity position.

Originality
This thesis addresses the existing gaps in the literature concerning the scanty body of studies on the impact of country factors on corporate risk management activities. Moreover, the thesis presents a comprehensive analysis of the corporate hedging activities of firms in Africa, which is missing in international studies. Examining to impact of corruption on financial derivative use extends existing evidence on the importance of considering macroeconomic factors in effective corporate risk management design. Also, studies on the corporate risk management activity of African firms provide evidence of financial practices and the role of corporate hedging in mitigating risk exposure in a market where volatility is high.

• Thesis Type: Thesis
• Deposit Date: Sep 1, 2024
• Publicly Available Date: Jun 23, 2025
• Public URL: https://uwe-repository.worktribe.com/output/12835129
• Related Public URLs: https://researchdata.uwe.ac.uk/id/eprint/746/
• Additional Information: Related dataset available from https://researchdata.uwe.ac.uk/id/eprint/746/
• Award Date: Jun 23, 2025