Abstract

This paper examines the effect of hedging on reducing the degree of information asymmetry. The effect of hedging on reducing information asymmetry is captured by comparing the abnormal returns and cumulative abnormal returns of hedgers and non-hedgers during their seasoned equity offering announcement period. Major findings of this paper are as follows. The abnormal returns and cumulative abnormal returns of hedging firms are significantly less negative than those of nonhedging firms. While the stock price run-ups prior to equity offering announcements for hedgers are significantly less than non-hedgers, the results on post-announcement long-term performance are mixed. Cross sectional analysis shows that even after controlling for the price pressure effect and other proxies of information asymmetry, the stock price reaction of hedgers is significantly less negative compared to non-hedgers. Our results provide evidence showing that hedging activities of a firm could be an important tool for shareholders to evaluate the firm's management quality and also reduce their information asymmetry disadvantage. A hedging firm also benefits from the reduction of information asymmetry by incurring lower costs of external financing.