Openness, hedging incentives and foreign exchange exposure: A firm-level multi-country study
AbstractThe benefits of openness to trade are well established, but the disadvantages of openness are less well understood. At the firm level trade is the principal source of exposure to exchange rate movements, and exchange exposure can be moderated by a range of hedging techniques. In this paper we ask two questions. First, do firms in open economies bear higher levels of exchange exposure than those in more closed economies? Second, is a strong corporate governance environment – one in which managers are incentivised to maximise shareholder value by hedging – associated with reduced firm-level exchange exposure? Using a sample of 3788 firms from 23 developed countries for the period 1984–2003, we show that the more open the economy, the more exposed are its firms to exchange rate movements, and this relation holds after controlling for firm size, industry and several financial variables. We also find a strong inverse relation between a firm's exchange exposure and the extent of creditor protection in the country in which it is based. This is consistent with managers acting to reduce the likelihood of financial distress in countries where bankruptcy costs are high, and it underlines the importance of institutional incentives in encouraging value-enhancing risk management activities.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Palgrave Macmillan in its journal Journal of International Business Studies.
Volume (Year): 41 (2010)
Issue (Month): 1 (January)
Contact details of provider:
Web page: http://www.palgrave-journals.com/
Postal: Palgrave Macmillan Journals, Subscription Department, Houndmills, Basingstoke, Hampshire RG21 6XS, UK
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Kearney, Colm, 2012. "Emerging markets research: Trends, issues and future directions," Emerging Markets Review, Elsevier, vol. 13(2), pages 159-183.
- Aggarwal, Raj & Berrill, Jenny & Hutson, Elaine & Kearney, Colm, 2011. "What is a multinational corporation? Classifying the degree of firm-level multinationality," International Business Review, Elsevier, vol. 20(5), pages 557-577, October.
- Bredin, Don & Hyde, Stuart, 2011.
"Investigating sources of unanticipated exposure in industry stock returns,"
Journal of Banking & Finance,
Elsevier, vol. 35(5), pages 1128-1142, May.
- Don Bredin & Stuart Hyde, 2010. "Investigating Sources of Unanticipated Exposure in Industry Stock Returns," Working Papers 201001, Geary Institute, University College Dublin.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Elizabeth Gale).
If references are entirely missing, you can add them using this form.