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The Determinants of Foreign Currency Hedging: Does Foreign Currency Debt Induce a Bias?

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Author Info

  • Ephraim Clark
  • Amrit Judge

Abstract

"In this paper we use UK data to present strong empirical evidence that explains the mixed results in previous studies with respect to the effect of financial distress on the demand for corporate hedging. We build on recent studies that have identified a strong link between foreign currency (FC) debt use and leverage. Given this relationship, we show that using leverage variables as proxies for financial distress and the failure to distinguish between FC debt users and non-users causes misleading inference. More specifically, when we partition our sample of FC hedgers into firms that use and do not use foreign debt, we show that leverage variables are significantly related to the FC hedging decision for firms that use FC debt either in isolation or in combination with FC derivatives but not for firms that only use FC derivatives. This suggests that FC debt users are influencing these results. However, we also find that other financial distress cost proxies with no obvious link to FC debt use are significant determinants in the corporate demand for FC hedging, including derivatives use." Copyright (c) 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by European Financial Management Association in its journal European Financial Management.

Volume (Year): 14 (2008)
Issue (Month): 3 ()
Pages: 445-469

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Handle: RePEc:bla:eufman:v:14:y:2008:i:3:p:445-469

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Cited by:
  1. Martin Brown & Steven Ongena & Pinar Yesin, 2012. "Information Asymmetry and Foreign Currency Borrowing by Small Firms," Working Papers 2012-05, Swiss National Bank.
  2. Christian Beer & Steven Ongena & Marcel Peter, 2008. "Borrowing in Foreign Currency: Austrian Households as Carry Traders," Working Papers 2008-19, Swiss National Bank.
  3. Paul Mizen & Frank Packer & Eli M Remolona & Serafeim Tsoukas, 2012. "Why do firms issue abroad? Lessons from onshore and offshore corporate bond finance in Asian emerging markets," BIS Working Papers 401, Bank for International Settlements.
  4. Martin Brown & Steven Ongena & Pinar Yesin, 2009. "Foreign Currency Borrowing by Small Firms," Working Papers 2009-02, Swiss National Bank.
  5. Nandy, Debarshi K., 2010. "Why do firms denominate bank loans in foreign currencies? Empirical evidence from Canada and U.K," Journal of Economics and Business, Elsevier, vol. 62(6), pages 577-603, November.
  6. Gatopoulos, Georgios & Loubergé, Henri, 2013. "Combined use of foreign debt and currency derivatives under the threat of currency crises: The case of Latin American firms," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 54-75.
  7. Brown, M. & Ongena, S. & Yesin, P., 2008. "Currency Denomination of Bank Loans: Evidence from Small Firms in Transition Countries," Discussion Paper 2008-16, Tilburg University, Center for Economic Research.
  8. Brown, Martin & Ongena, Steven & Yesin, Pinar, 2011. "Foreign currency borrowing by small firms in the transition economies," Journal of Financial Intermediation, Elsevier, vol. 20(3), pages 285-302, July.

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