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The use of foreign currency derivatives, corporate governance, and firm value around the world

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  • Allayannis, George
  • Lel, Ugur
  • Miller, Darius P.

Abstract

This paper examines the impact of currency derivatives on firm value using a broad sample of firms from thirty-nine countries with significant exchange-rate exposure. Derivatives can be used for managers' self-interest, for hedging or for speculative purposes. We hypothesize that investors can appeal to a firm's internal (firm-level) and external (country-level) corporate governance to draw inferences on a firm's motive behind the use of derivatives, since well-governed firms are more likely to use derivatives to hedge rather than to speculate or pursue managers' self-interest. Consistent with this explanation, we find strong evidence that the use of currency derivatives for firms that have strong internal firm-level or external country-level governance is associated with a significant value premium.

Suggested Citation

  • Allayannis, George & Lel, Ugur & Miller, Darius P., 2012. "The use of foreign currency derivatives, corporate governance, and firm value around the world," Journal of International Economics, Elsevier, vol. 87(1), pages 65-79.
  • Handle: RePEc:eee:inecon:v:87:y:2012:i:1:p:65-79
    DOI: 10.1016/j.jinteco.2011.12.003
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