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Currency hedging and corporate governance: a cross-country analysis

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  • Ugur Lel

Abstract

Corporate governance can provide mechanisms to effectively monitor the use of derivatives. Using a sample of firms from 34 countries over the period 1990 to 1999, I find that firms with strong governance use currency derivatives for value-maximizing reasons as established by theory. On the other hand, firms with weak governance use such derivatives mostly for managerial self-interests and selective hedging. These results are robust to using a sample of US firms, the use of foreign denominated debt as an alternative strategy to hedge currency risk, selection bias, and a possible endogeneity between hedging policies, corporate governance, and other financial policies. Overall, the results serve as the first comprehensive evidence on the impact of corporate governance on why firms use derivatives and consequently why they hedge.

Suggested Citation

  • Ugur Lel, 2006. "Currency hedging and corporate governance: a cross-country analysis," International Finance Discussion Papers 858, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:858
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    More about this item

    Keywords

    Corporate governance; Hedging (Finance); Derivative securities;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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