Examining the Association between Optimal Hedging Strategy and Cost of Capital: Evidence from Egypt
Abstract
This paper aims to examine whether the adoption of the optimal additional hedging strategy, which was developed through an optimization model by Ebach et al. (2016), contributes to reducing the cost of capital (COC) arising from the high degree of the risk of earnings volatility which induced by way of measuring financial derivatives at fair value method. The analysis is performed on all 13 Egyptian banks listed in Egyptian exchange (EGX 100) from 2015-to 2020, resulting in 78 observations. Pearson correlation and multiple regression analysis are used to test the research hypothesis. Findings of the study showed a strong negative significant association between the optimal hedging strategy (OHS) and COC, which implies that the application of the optimal additional hedging strategy developed by Ebach et al. (2016) leads to reducing the costs of earnings volatility which represents the COC.
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References
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Alam, N., & Gupta, A. (2018). Does hedging enhance firm value in good and bad times. International Journal of Accounting & Information Management, 26(1), 132-152. http://dx.doi.org/10.1108/IJAIM-03-2017-0041
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Bhagawan, P., & Lukose, J. (2016). The determinants of currency derivatives usage among Indian non-financial firms: An empirical study. Studies in Economics & Finance, 34(3), 363-382. http://dx.doi.org/10.1108/SEF-09-2014-0172
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Chen, J., & King, T. -H. D. (2014). Corporate hedging and the cost of debt. Journal of Corporate Finance, 29, 221-245. https://doi.org/10.1016/j.jcorpfin.2014.09.006
Coffie, W., Bedi, I., & Amidu, M. (2018). The effects of audit quality on the costs of capital of firms in Ghana. Journal of Financial Reporting & Accounting, 16(4), 639-659. http://doi.org/10.1108/JFRA-03-2017-0018
Coutinho, J. R. R., Sheng, H. H., & Lora, M. I. (2012). The use of Fx derivatives and the cost of capital: Evidence of Brazilian companies. Emerging Markets Review, 13(4), 411-423. http://dx.doi.org/10.1016/j.ememar.2012.07.001
Deng, S., Elyasiani, E., & Mao, C. X. (2017). Derivatives-hedging, risk allocation and the cost of debt: Evidence from bank holding companies. The Quarterly Review of Economics & Finance, 65, 114-127. https://doi.org/10.1016/j.qref.2016.06.004
Duh, R. -R., Hsu, A. W., & Alves, P. A. P., (2012). The impact of IAS 39 on the riskrelevance of earnings volatility: Evidence from foreign banks cross-listed in the USA. Journal of Contemporary Accounting & Economics, 8(1), 23-38. https://doi.org/10.1016/j.jcae.2012.03.002
Ebach, E. M., Hertel, M., Lindermeir, A., & Tränkler, T., (2016). Toward an optimal hedging strategy considering earnings volatility through fair value accounted financial derivatives. The Journal of Risk Finance, 17(3), 310-327. http://doi.org/10.1108/JRF-07-2015-0064
Franceys, R., Naafs, A., Pezon, C., & Fonseca, C. (2011). The cost of capital: Costs of financing capital expenditure for water and sanitation (WASHCost global briefing note No. 1c). IRC International Water and Sanitation Centre.
Fudenberg, D., & Tirole, J. (1995). A theory of income and dividend smoothing based on incumbency rents. Journal of Political economy, 103(1), 75-93. http://dx.doi.org/10.1086/261976
Hadian, A., & Adaoglu, C. (2020). The effects of financial and operational hedging on company value: The case of Malaysian multinationals. Journal of Asian Economics, 70, 1-66. https://dx.doi.org/10.2139/ssrn.3724984
Hodder, L. D., Hopkins, P. E., & Wahlen, J. M., (2006). Risk-relevance of fair-value income measures for commercial banks. The Accounting Review, 81(2), 337-375. http://dx.doi.org/10.2308/accr.2006.81.2.337
Kanagaretnam, K., Lobo, G. J., & Mathieu, R. (2003). Managerial incentives for income smoothing through bank loan loss provisions. Review of Quantitative Finance & Accounting, 20(1), 63-80. http://dx.doi.org/10.2139/ssrn.292674
Krichene, N. (2013). Islamic capital markets: Theory and practice. New Jersey, USA: John Wiley & Sons. https://www.wiley.com/en-us/Islamic+Capital+Markets%3A+Theory+and+Practice-p-9781118247167
Malz, A. M. (2011). Financial risk management: Models, history, and institutions. New Jersey, USA: John Wiley & Sons.
Mian, S. L. (1996). Evidence on corporate hedging policy. Journal of Financial & Quantitative Analysis, 31(3), 409-439. Doi: 10.2307/2331399.
Minton, B. A., & Schrand, C. (1999). The impact of cash flow volatility on discretionary investment and the costs of debt and equity financing. Journal of Financial Economics, 54(3), 423-460.
Mo, K., Suvankulov, F., & Griffiths, S. (2021). Financial distress and commodity hedging: Evidence from Canadian oil firms. Energy Economics, 97, 1-29. https://doi.org/10.1016/j.eneco.2021.105162
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48(3), 261-297. https://www.jstor.org/stable/1809766
Munteanu, L. (2011). Cost of equity, financial information disclosure, and IFRS adoption: A literature review. Internal Auditing & Risk Management, 6(4), 67-80. https://ideas.repec.org/a/ath/journl/tome24v4y2011i24p67-80.html
Nance, D. R., Smith, C. W., Jr., & Smithson, C. W. (1993). On the determinants of corporate hedging. The Journal of Finance, 48(1), 267-284. Doi: 10.1111/j.1540-6261.1993.tb04709.x.
Paramasivan, C., & Subramaniam, T. (2009). Financial management (pp. 12-20). New Delhi, India: New Age International Publishers.
Rountree, B., Weston, J. P., & Allayannis, G. (2008). Do investors value smooth performance? Journal of Financial Economics, 90(3), 237-251. https://doi.org/10.1016/j.jfineco.2008.02.002
Satyanarayana, P. V. V. (2016). Financial management. New Delhi, India: Discovery Publishing House Pvt. Ltd. ISBN 978-9350568019.
Sharfman, M. P., & Fernando, C. S. (2008). Environmental risk management and the cost of capital. Strategic Management Journal, 29(6), 569-592. https://onlinelibrary.wiley.com/doi/10.1002/smj.678
Soh, T. M. (2011). Corporate governance and the cost of capital. International Journal of Governance, 1(1), 1-20.
Stulz, R. M. (1984). Optimal Hedging Policies. Journal of Financial & Quantitative Analysis, 19(2), 127-140. https://doi.org/10.2307/2330894
Alam, N., & Gupta, A. (2018). Does hedging enhance firm value in good and bad times. International Journal of Accounting & Information Management, 26(1), 132-152. http://dx.doi.org/10.1108/IJAIM-03-2017-0041
Allayannis, G., Rountree, B., & Weston, J. P. (2005). Earnings volatility, cash flow volatility, and firm value. Journal of Financial Economics, 78(3), 577–606.
Amaya, D., Gauthier, G., & Léautier, T. -O. (2015). Dynamic risk management: Investment, capital structure, and hedging in the presence of financial frictions. Journal of Risk & Insurance, 82(2), 359-399. https://doi.org/10.1111/jori.12025
Aretz, K., Bartram, S. M., & Dufey, G. (2007). Why hedge? Rationales for corporate hedging and value implications. The Journal of Risk Finance, 8(5), 434-449. Doi: 10.1108/15265940710834735.
Barnes, R., (2001). Accounting for derivatives and corporate risk management policies. London Business School Accounting Subject Area Working Paper No. 018. https://ssrn.com/abstract=298021
Beaver, W., Kettler, P., & Scholes, M. (1970). The association between market determined and accounting determined risk measures. The Accounting Review, 45(4), 654-682. Doi: 10.2307/244321.
Bhagawan, P., & Lukose, J. (2016). The determinants of currency derivatives usage among Indian non-financial firms: An empirical study. Studies in Economics & Finance, 34(3), 363-382. http://dx.doi.org/10.1108/SEF-09-2014-0172
BIS (Bank for International Settlements). (1995). Issues of measurement related to market size and macroprudential risks in derivatives markets. Retrieved January 15, 2022 from https://www.bis.org/publ/ecsc05.htm
Brushwood, J., Dhaliwal, D. S., Fairhurst, D. J., & Serfling, M. (2016). Property crime, earnings variability, and the cost of capital. Journal of Corporate Finance, 40, 142-173. https://dx.doi.org/10.2139/ssrn.2370644
Chen, J., & King, T. -H. D. (2014). Corporate hedging and the cost of debt. Journal of Corporate Finance, 29, 221-245. https://doi.org/10.1016/j.jcorpfin.2014.09.006
Coffie, W., Bedi, I., & Amidu, M. (2018). The effects of audit quality on the costs of capital of firms in Ghana. Journal of Financial Reporting & Accounting, 16(4), 639-659. http://doi.org/10.1108/JFRA-03-2017-0018
Coutinho, J. R. R., Sheng, H. H., & Lora, M. I. (2012). The use of Fx derivatives and the cost of capital: Evidence of Brazilian companies. Emerging Markets Review, 13(4), 411-423. http://dx.doi.org/10.1016/j.ememar.2012.07.001
Deng, S., Elyasiani, E., & Mao, C. X. (2017). Derivatives-hedging, risk allocation and the cost of debt: Evidence from bank holding companies. The Quarterly Review of Economics & Finance, 65, 114-127. https://doi.org/10.1016/j.qref.2016.06.004
Duh, R. -R., Hsu, A. W., & Alves, P. A. P., (2012). The impact of IAS 39 on the riskrelevance of earnings volatility: Evidence from foreign banks cross-listed in the USA. Journal of Contemporary Accounting & Economics, 8(1), 23-38. https://doi.org/10.1016/j.jcae.2012.03.002
Ebach, E. M., Hertel, M., Lindermeir, A., & Tränkler, T., (2016). Toward an optimal hedging strategy considering earnings volatility through fair value accounted financial derivatives. The Journal of Risk Finance, 17(3), 310-327. http://doi.org/10.1108/JRF-07-2015-0064
Franceys, R., Naafs, A., Pezon, C., & Fonseca, C. (2011). The cost of capital: Costs of financing capital expenditure for water and sanitation (WASHCost global briefing note No. 1c). IRC International Water and Sanitation Centre.
Fudenberg, D., & Tirole, J. (1995). A theory of income and dividend smoothing based on incumbency rents. Journal of Political economy, 103(1), 75-93. http://dx.doi.org/10.1086/261976
Hadian, A., & Adaoglu, C. (2020). The effects of financial and operational hedging on company value: The case of Malaysian multinationals. Journal of Asian Economics, 70, 1-66. https://dx.doi.org/10.2139/ssrn.3724984
Hodder, L. D., Hopkins, P. E., & Wahlen, J. M., (2006). Risk-relevance of fair-value income measures for commercial banks. The Accounting Review, 81(2), 337-375. http://dx.doi.org/10.2308/accr.2006.81.2.337
Kanagaretnam, K., Lobo, G. J., & Mathieu, R. (2003). Managerial incentives for income smoothing through bank loan loss provisions. Review of Quantitative Finance & Accounting, 20(1), 63-80. http://dx.doi.org/10.2139/ssrn.292674
Krichene, N. (2013). Islamic capital markets: Theory and practice. New Jersey, USA: John Wiley & Sons. https://www.wiley.com/en-us/Islamic+Capital+Markets%3A+Theory+and+Practice-p-9781118247167
Malz, A. M. (2011). Financial risk management: Models, history, and institutions. New Jersey, USA: John Wiley & Sons.
Mian, S. L. (1996). Evidence on corporate hedging policy. Journal of Financial & Quantitative Analysis, 31(3), 409-439. Doi: 10.2307/2331399.
Minton, B. A., & Schrand, C. (1999). The impact of cash flow volatility on discretionary investment and the costs of debt and equity financing. Journal of Financial Economics, 54(3), 423-460.
Mo, K., Suvankulov, F., & Griffiths, S. (2021). Financial distress and commodity hedging: Evidence from Canadian oil firms. Energy Economics, 97, 1-29. https://doi.org/10.1016/j.eneco.2021.105162
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48(3), 261-297. https://www.jstor.org/stable/1809766
Munteanu, L. (2011). Cost of equity, financial information disclosure, and IFRS adoption: A literature review. Internal Auditing & Risk Management, 6(4), 67-80. https://ideas.repec.org/a/ath/journl/tome24v4y2011i24p67-80.html
Nance, D. R., Smith, C. W., Jr., & Smithson, C. W. (1993). On the determinants of corporate hedging. The Journal of Finance, 48(1), 267-284. Doi: 10.1111/j.1540-6261.1993.tb04709.x.
Paramasivan, C., & Subramaniam, T. (2009). Financial management (pp. 12-20). New Delhi, India: New Age International Publishers.
Rountree, B., Weston, J. P., & Allayannis, G. (2008). Do investors value smooth performance? Journal of Financial Economics, 90(3), 237-251. https://doi.org/10.1016/j.jfineco.2008.02.002
Satyanarayana, P. V. V. (2016). Financial management. New Delhi, India: Discovery Publishing House Pvt. Ltd. ISBN 978-9350568019.
Sharfman, M. P., & Fernando, C. S. (2008). Environmental risk management and the cost of capital. Strategic Management Journal, 29(6), 569-592. https://onlinelibrary.wiley.com/doi/10.1002/smj.678
Soh, T. M. (2011). Corporate governance and the cost of capital. International Journal of Governance, 1(1), 1-20.
Stulz, R. M. (1984). Optimal Hedging Policies. Journal of Financial & Quantitative Analysis, 19(2), 127-140. https://doi.org/10.2307/2330894
Published
2026-04-21
How to Cite
GAMAL, Menna; ABDEL-KADER, Magdy; ABDELKARIM, Kholoud.
Examining the Association between Optimal Hedging Strategy and Cost of Capital: Evidence from Egypt.
Journal of Accounting, Business and Management (JABM), [S.l.], v. 33, n. 1, p. 1-12, apr. 2026.
ISSN 2622-2167.
Available at: <https://journal.stie-mce.ac.id/index.php/jabminternational/article/view/969>. Date accessed: 26 apr. 2026.
doi: https://doi.org/10.31966/jabminternational.v33i1.969.
Section
Articles
