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Why and How UK Firms Hedge

Author

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  • Amrit Judge

Abstract

"This paper attempts to differentiate among the theories of hedging by using disclosures in the annual reports of 400 UK companies and data collected via a survey. I find, unlike many previous US studies, strong evidence linking the decision to hedge and the expected costs of financial distress. The tests show that this is mainly because my definition of hedging includes all hedgers and not just derivative users. However, when the tests employ the same hedging definition as previous US studies, financial distress cost factors still appear to be more important for this sample than samples of US firms. Therefore, a secondary explanation for the strong financial distress results might be due to differences in the bankruptcy codes in the two countries, which result in higher expected costs of financial distress for UK firms. The paper also examines the determinants of the choice of hedging method distinguishing between non-derivative and derivatives hedging. My evidence shows that larger firms, firms with more cash, firms with a greater probability of financial distress, firms with exports or imports and firms with more short-term debt are more likely to hedge with derivatives. Thus, differences in opportunities, in incentives for reducing risk and in the types of financial price exposure play an important role in how firms hedge their risks." Copyright Blackwell Publishers Ltd, 2006.

Suggested Citation

  • Amrit Judge, 2006. "Why and How UK Firms Hedge," European Financial Management, European Financial Management Association, vol. 12(3), pages 407-441.
  • Handle: RePEc:bla:eufman:v:12:y:2006:i:3:p:407-441
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1354-7798.2006.00326.x
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    Citations

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    Cited by:

    1. Maria João Jorge & Mário Gomes Augusto, 2011. "The Value Of Hedging Through Corporate Governance: A Literature Review And Directions For Future Research," Portuguese Journal of Management Studies, ISEG, Universidade de Lisboa, vol. 0(2), pages 113-130.
    2. Zhou, Victoria Yun & Wang, Peijie, 2013. "Managing foreign exchange risk with derivatives in UK non-financial firms," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 294-302.
    3. repec:pal:jintbs:v:49:y:2018:i:1:d:10.1057_s41267-017-0090-z is not listed on IDEAS
    4. Klimczak, Karol Marek, 2007. "Risk Management Theory: A comprehensive empirical assessment," MPRA Paper 4241, University Library of Munich, Germany.
    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. Mariano Graziano, 2012. "Italian nonfinancial firms and derivatives," Questioni di Economia e Finanza (Occasional Papers) 139, Bank of Italy, Economic Research and International Relations Area.
    7. José Luiz Rossi Júnior, 2007. "The Use of Currency Derivatives by Brazilian Companies: An Empirical Investigation," Brazilian Review of Finance, Brazilian Society of Finance, vol. 5(2), pages 205-232.
    8. repec:eee:finsta:v:33:y:2017:i:c:p:60-70 is not listed on IDEAS
    9. repec:eee:quaeco:v:65:y:2017:i:c:p:128-136 is not listed on IDEAS
    10. Kim, Huong Trang & Papanastassiou, Marina & Nguyen, Quang, 2017. "Multinationals and the impact of corruption on financial derivatives use and firm value: Evidence from East Asia," Journal of Multinational Financial Management, Elsevier, vol. 39(C), pages 39-59.

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