Hedging Policies to Reduce Agency Costs in Brazil

Abstract

Given the recent Brazilian economic scenario, characterized by political uncertainties and economic instabilities, it is essential for companies to engage in hedging as part of their financial policy in order to prevent their results from being affected by market frictions. In this context, the present study aimed to verify the impact of hedging on the agency costs of Brazilian companies. The methodology used was that of panel data contemplating a manually collected database of 154 companies between 2010 and 2017 (all companies that use derivatives for hedging). The results obtained agree with the literature on hedging and agency costs, indicating that the greater the use of hedging, the lower the agency costs faced by shareholders, expanding on the discussions involving developed markets. This relationship shows that by using hedging in a company’s financial policy, managers can minimize the impacts of market frictions and reduce the residual losses of shareholders in relation to what would otherwise occur.

Relationship of the rating of the companies with the forecast error of market analysts

“…With the results obtained by the present study, the hypothesis that the forecast error of the results is positively related to the risk rating on credit quality was confirmed. As it is a primitive study, no previous work was found on the relationship between forecast error and rating, however the research advances and connects the works of Gatsios (2013), Gatsios et al (2018), Jiang (2022), Lima et al (2016), Magnani et al (2022), andSaadaoui et al (2022).…”

“…Still on analysts' forecasts, Magnani et al (2022) evaluated the effects of hedging on analysts' forecasts. The authors concluded that in emerging markets, with high volatility of macroeconomic variables and political instability, the corporate hedging policy, the rating assigned to the credit ratings of public companies and liquidity indices are key variables that influence analysts' forecasts.…”

“…As for international research, recent articles are looking for the relationship between rating classifications and the effects of corporate decisions from ESG (Saadaoui, et al, 2022;Zanin, 2021). Other papers also explore the relationship between accounting indicators and ratings and incorporate the effects of company risk into the models, measuring them mainly by the volatility of their earnings (Jiang, 2022;Magnani, 2017;Magnani et al, 2022).…”

“…Thus, the credit rating and the analysts' forecast are linked to the company's risk, given that companies with higher risk present greater volatility in their profits and can impair the analysts' predictability ((DeMarzo & Duffie, 1995;Magnani, 2017;Magnani et al, 2022). Thus, the following research question arises: What is the relationship between credit ratings and the error of analysts' forecasts?…”