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Factors affecting Chinese enterprises' hedging decision making

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Author Info

  • Shi Zheng
  • Pei Xu
  • Zhigang Wang
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    Abstract

    Purpose – The purpose of this paper is to find factors that explain why some enterprises hedge but others do not. The authors' analysis relies on Heckman model (a probit and Tobit model) with the data obtained from questionnaires collected from Chinese enterprises. Given the fact that only a small portion of Chinese agribusinesses hedge, this paper provides some initial academic evidence to help the agricultural sector devise useful programs to assist participations of hedging. Design/methodology/approach – A Heckman selection model was developed to analyze questionnaire information obtained using face-to-face interviews with 218 Chinese agribusinesses. This paper presents summary statistics, Heckman estimation results, and interpretations of the results. Findings – Survey results show that a majority of surveyed firms believe that futures market cannot reduce risks or increase income. According to the study, factors affecting enterprises hedging decisions include: to what degree that Chinese enterprises believe hedging leads to business stability; whether these enterprises had attended a hedge training or seminar; perceived price volatility in the market; and have alternative strategies to reduce price risks. Practical implications – Agribusiness assistance programs can use this paper's findings to plan effective hedge training to help improve participation of futures hedging. Originality/value – This study analyzes Chinese agribusiness firms' hedging behaviour, using a new set of questionnaire data collected from main agribusinesses. Chinese agribusiness firms' hedging behavior has not been fully examined. This study fills this gap.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal China Agricultural Economic Review.

    Volume (Year): 3 (2011)
    Issue (Month): 4 (November)
    Pages: 476-488

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    Handle: RePEc:eme:caerpp:v:3:y:2011:i:4:p:476-488

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    Web page: http://www.emeraldinsight.com

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    Related research

    Keywords: China; Decision making; Futures markets; Heckman model; Hedge ratio; Hedging;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Nance, Deana R & Smith, Clifford W, Jr & Smithson, Charles W, 1993. " On the Determinants of Corporate Hedging," Journal of Finance, American Finance Association, vol. 48(1), pages 267-84, March.
    2. René M. Stulz, 1996. "Rethinking Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(3), pages 8-25.
    3. Angrist, Joshua D, 2001. "Estimations of Limited Dependent Variable Models with Dummy Endogenous Regressors: Simple Strategies for Empirical Practice: Reply," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(1), pages 27-28, January.
    4. Joshua Angrist, 1999. "Estimation of Limited-Dependent Variable Models with Dummy Endogenous Regressors: Simple Strategies for Empirical Practice," Working papers 99-31, Massachusetts Institute of Technology (MIT), Department of Economics.
    5. Ani L. Katchova & Mario J. Miranda, 2004. "Two-Step Econometric Estimation of Farm Characteristics Affecting Marketing Contract Decisions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(1), pages 88-102.
    6. Smith, Richard J & Blundell, Richard W, 1986. "An Exogeneity Test for a Simultaneous Equation Tobit Model with an Application to Labor Supply," Econometrica, Econometric Society, vol. 54(3), pages 679-85, May.
    7. H. Holly Wang & Bingfan Ke, 2005. "Efficiency tests of agricultural commodity futures markets in China," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 49(2), pages 125-141, 06.
    8. Hayne E. Leland., 1979. "Who Should Buy Portfolio Insurance?," Research Program in Finance Working Papers 95, University of California at Berkeley.
    9. Wang, H. Holly & Ke, Bingfan, 2005. "Efficiency tests of agricultural commodity futures markets in China," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 49(2), June.
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