International Journal of Economics and Finance; Vol. 8, No. 12; 2016 ISSN 1916-971X E-ISSN 1916-9728 Published by Canadian Center of Science and Education 151 Determinants of Corporate Hedging: Evidence from Emerging Market Cigdem Vural-Yavas 1 1 Department of Management, Bogazici University, Turkey Correspondence: Cigdem Vural-Yavas, Department of Management, Bogazici University, Turkey. E-mail: crocusv@gmail.com Received: October 5, 2016 Accepted: October 26, 2016 Online Published: November 20, 2016 doi:10.5539/ijef.v8n12p151 URL: http://dx.doi.org/10.5539/ijef.v8n12p151 Abstract The main purpose of this study is to understand the determinants of corporate hedging in emerging markets. The dependent variable, hedging, is estimated by a categorical variable. This process necessitates the usage of logistic regression. The analysis is conducted using data from non-financial companies listed in Borsa Istanbul (BIST) between 2010 and 2014. Evidence reveals that the cost of underinvestment has the highest impact on the likelihood of hedging. Firms with higher cost of underinvestment are more likely to use financial derivatives. The second most important determinant of hedging is growth opportunities. Interestingly, firms with greater growth opportunities are less likely to use derivatives in emerging markets. Results indicate that firm size, foreign sales, profitability, and dividend yield are the other predictors that increase the likelihood of hedging. On the other hand, growth opportunities, free-float rate, interest coverage ratio, and leverage have a negative relationship with the possibility of using financial derivatives. Keywords: hedging, financial distress, underinvestment, information asymmetry, hedging substitutes, logistic regression 1. Introduction In a perfect market, the irrelevance propositions of Modigliani and Miller imply that hedging does not increase firm value. Thus, risk management is irrelevant. There is no information asymmetry, transaction costs or taxes in perfect capital markets. Investors can use the information and financial investment tools to diversify their portfolio risk with the same cost as firms do, for the reduction of risk. In other words, shareholders can reduce their risk by holding well-diversified portfolios with the same cost as firms can. On the other hand, when the market is not perfect, it will be more costly for individual investors to diversify their risk. So, shareholders prefer their firm to diversify risk on behalf of them. Market imperfections force the corporation to hedge investment risk and to reduce the volatility of corporate earnings and cash flows. Many studies analyze why firms hedge and which market imperfections make firms to hedge. Mayers and Smith (1982), mentioned seven possible explanations for corporate hedging: the comparative advantage of risk bearing, lower expected transactions cost of bankruptcy, providing real service efficiencies, monitoring, bonding investment decisions, lowering the expected tax liabilities and reducing regulatory costs. However, in this study, Mayers and Smith (1982) did not provide any empirical support for the aformentioned possible reasons for corporate hedging. On their later work, Mayers and Smith (1990) examined the reinsurance market and found strong evidence for the effect of ownership structure, size, geographic concentration and line-of-business concentration on the demand for reinsurance by insurance companies. In the literature, many theories based on market imperfections try to explain possible reasons for corporate demand for hedging. Managers’ risk aversion, minimizing expected tax liabilities, reducing some costs such as financial distress cost, underinvestment costs and decreasing information asymmetry between shareholders and managers are some of the determinants of firm off-balance-sheet derivative usage. In fact, Mayers and Smith (1982) argued that hedging increases firm value through reducing financing costs. The main purpose of this study is to understand the determinants, in the emerging markets, of firms’ desire to hedge their positions. Hedging and firm value are closely related, and in fact, hedging increases firm value (e.g. Allayannis, Lel, & Miller, 2012; Carter, Rogers, & Simkins, 2006; Allayannis & Weston, 2001). Indeed, Allayannis et al. (2012) analyze the effect of hedging on firm value for thirty-nine counties, and find a significant value premium for hedgers. When considered from this point of view, exploring the determinants of