An Empirical Study of Derivatives Usage in the Australian Gold Mining Industry

This paper investigates corporate hedging activities in the Australian gold mining industry. We find that the Australian companies in 1997 are more actively involved in gold derivative markets than their counterparts in North America in 1993. This may suggest a general risk-averse attitude among the Australian managers when comparing with the North American managers. We also find that corporate hedging activities are associated with some of firm characteristics, however, in different patterns. In contrast to the linear relationship suggested by previous researches, we find some empirical support for the nonlinear relationship between the possibility of financial distress and hedging levels. High and low cash production costs are found to be associated with low hedging percentage, whilst medium level cash production cost is associated with high hedging percentage. This paper also tests the relationship between hedging level and cash flow since most surveys report that the primary objective of hedging is to manage cash flows. Evidence is found that hedging percentage is associated with internal cash flow constraints. However, we find no evidence to suggest the relationship between hedging activities and cash flow from external funding sources. Surprisingly, hedging is not associated with funding sources from debt market as information asymmetry theory strongly suggested.