Abnormal Returns From Hedging, Firm Size, and the Fama and French Multifactor Models

James M. Nelson


I use the Fama and French (2015) five-factor model to reexamine the seemingly anomalous result of Nelson, Moffitt, and Affleck-Graves (2005), who document significant positive abnormal returns for firms that hedge. Contrary to their results, using the five-factor model on a new sample of U.S. firms from 2013 – 2021, I observe significant negative monthly abnormal returns of -0.190% (-2.26% annually) for firms using derivative securities (hedgers). My result is consistent with poorly diversified managers engaging in costly hedging behavior that benefits management at the cost of shareholders. When I divide the sample by size (total assets), I find that the significant negative abnormal returns are confined only to large firms, offering no support for the economies of scale or managerial sophistication hypotheses.

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DOI: https://doi.org/10.5430/ijfr.v14n2p71

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This work is licensed under a Creative Commons Attribution 4.0 International License.

This journal is licensed under a Creative Commons Attribution 4.0 License.

International Journal of Financial Research
ISSN 1923-4023(Print)ISSN 1923-4031(Online)


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