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The German humpback: Internationalization and foreign exchange hedging

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  • Aabo, Tom
  • Ploeen, Rasmus

Abstract

Previous studies find a monotonic positive relationship between a firm's internationalization and its foreign exchange hedging. We argue that high levels of internationalization can reduce the need for foreign exchange hedging through diversification (e.g. sales to several markets) and operational hedging (matching of cash flows and operational flexibility). We employ multivariate regression analysis and find an inverse U-shape relationship (“humpback”) for large listed non-financial German firms. Foreign exchange hedging activity peaks when half of sales (or long-term assets) is outside Europe. We do not find support that diversification or production facilities abroad drive our results. Our paper is the first empirical paper to document an inverse U-shape relationship between internationalization and foreign exchange hedging.

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  • Aabo, Tom & Ploeen, Rasmus, 2014. "The German humpback: Internationalization and foreign exchange hedging," Journal of Multinational Financial Management, Elsevier, vol. 27(C), pages 114-129.
  • Handle: RePEc:eee:mulfin:v:27:y:2014:i:c:p:114-129
    DOI: 10.1016/j.mulfin.2014.05.001
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    More about this item

    Keywords

    Internationalization; Foreign exchange hedging; Diversification; Cash flow matching; Operational flexibility;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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