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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Multinational Financial Management, Volume 10, Issue 2, June 2000, Pages 161–184
This study presents the empirical results for the relationship between the use of hedging techniques and the characteristics of UK multinational enterprises (MNEs). All the firms in the sample hedge foreign exchange (FX) exposure. The results indicate that UK firms focus on a very narrow set of hedging techniques. They make much greater use of derivatives than internal hedging techniques. The degree of utilisation of both internal and external techniques depends on the type of exposure that is hedged. Furthermore, the characteristics of the firms appear to explain the choice of hedging technique but the use of certain hedging techniques appears to be associated with increases in the variability of some accounting measures. This adverse impact of hedging has not been emphasised in the finance literature. The results imply that firms need to ensure that the appropriate techniques are used to hedge exposures.
Most theoretical studies that seek to explain why industrial firms hedge exposure focus on differences in the financial characteristics of users and non-users of hedging techniques1. The empirical work which seeks to test the theoretical predictions takes a similar focus. However, the findings for certain hypothesised relationships are often weak in both univariate and multivariate statistical tests (see Dolde, 1993 and Nance et al., 1993). One possible explanation for the weak empirical results of certain theoretical predictions relates to research design. For example, to identify US industrial firms as hedgers (users) and non-hedgers (non-users), both Nance et al. (1993) and Dolde (1995) used a questionnaire survey which required respondents to indicate whether or not they use one (or more) of four currency derivatives, i.e. forward, futures, swap and/or option contracts. In contrast, Berkman and Bradbury (1996) choose to categorise the firms in their study in terms of the hedging information contained in their audited financial reports (see also Francis and Stephan, 1993 and Geczy et al., 1997). Since firms are only required to disclose exposure information if such information is material, this latter approach may not fully capture the hedging activities of firms. However, both approaches seem restrictive since firms use a wide range of internal and external techniques (including derivatives) to hedge foreign exchange (FX) and interest rate exposures (see Stanley and Block, 1980 and Khoury and Chan, 1988). Furthermore, some firms may not hedge simply because they have no exposure while others may not hedge or partially hedge depending on their perception about FX rate behaviour and/or their confidence in using derivatives (see Dolde, 1993). These considerations therefore have important implications for the empirical results of prior studies. This study seeks to provide additional insights into the hedging behaviour of UK firms by focusing on: (i) the degree of utilisation of a broad set of hedging techniques; (ii) the maturity structures of those hedging techniques; and (iii) the sources or types of exposures that are hedged. Those aspects are examined because firms are known to make use of a wide range of techniques when hedging exposure and to exercise substantial flexibility in hedging decisions (see Hakkarainen et al., 1998). Although newer financial innovations can reduce the demand for traditional types of hedging techniques (see Tufano, 1995), empirical evidence indicates that firms are not very receptive to the newer and more complex types of derivatives. This is because firms are concerned about the banks’ commitment to those products and their ability to provide real solutions to exposure problems (see Fairlamb, 1988 and Glaum and Belk, 1992). Furthermore, managers can always adjust their hedging decisions to reflect their expectations of changes in financial prices. Thus, if the forward rate is a biased predictor, managers can alter their hedging strategies to accommodate this effect. Here, a partial or no hedge or fully hedged strategy can be optimal for both transaction and economic exposures (see Berg and Moore, 1991 and Schooley and White, 1995). Since firms tend to place more emphasis on transaction exposure than on economic and translation exposures (Khoury and Chan, 1988 and Joseph and Hewins, 1991), their use of hedging techniques may reflect the types of exposures they hedge. An examination of a broad set of hedging techniques is also warranted since in certain situations, the use of some techniques can give rise to adverse effects2. For example, the use of both forward and futures contracts to hedge translation exposure can give rise to economic (cash flow) gains/losses which are not off-set by losses/gains from the underlying exposure. Giddy and Dufey (1995) (p. 51) also show that FX “…options are not ideal hedging instruments for corporations” since the gains/losses which arise from their use are not linearly related to changes in the value of the currency, thereby, increasing the variability of the firm’s real cash flow. But forward contracts can only hedge economic exposure optimally if managerial decisions regarding inputs and outputs are fixed; otherwise, FX options may be more appropriate (see Ware and Winter, 1988). In the absence of default, the use of forward contracts to hedge transaction exposure does not result in any gain or loss. However, both (long-term) economic and translation exposures tend to have maturities which exceed those of FX forward, futures and option contracts (see also Neuberger, 1996) such that a mis-match of the cash flows from the derivatives and the gain/loss from the underlying exposures will arise. Further, because of basis risk, a one-to-one hedge ratio can increase the variability of the firm’s cash flow if short-dated futures contracts are used to hedge (see Mello and Parsons, 1995). Firms can also hedge with internal techniques, such as, leads and lags which do not give rise to the maturity problems of external techniques. In this case, the impact on the financial measures would depend on the hedging effectiveness of the internal techniques that are used. Finally, Glaum and Belk (1992) also examined the use of hedging techniques of 17 UK firms but they did not link the degree of usage to the characteristics of their firms. This present study focuses on a much larger sample of UK firms across a broader set of hedging techniques. The degree of utilisation is also linked to the characteristics of the firms. The remaining sections of this study are as follows: Section 2 describes the theoretical framework and the research methodology. The empirical measures are also described and the hypotheses are formulated in that section. Section 3 presents the empirical results. The results are summarised and their implications are evaluated in the Section 4.
نتیجه گیری انگلیسی
This empirical study is concerned with the use of both internal and external hedging techniques by large UK MNEs and the extent to which cross-sectional variation in the characteristics of those firms can explain the degree of usage. The empirical results show that UK firms utilise a narrow set of techniques to hedge exposure. The firms place much more emphasis on currency derivatives than on internal hedging techniques. This emphasis is not consistent with the approach that is suggested in the academic literature (see McRae and Walker, 1980) and the implications of prior empirical work (see Hakkarainen et al., 1998, p. 44). Also, the firms place more emphasis on transaction exposure and economic exposure and much less on translation exposure. Those findings are informative since they show that not all the traditional hedging techniques are utilised by the firms despite the proliferation of financial innovations in recent years (see Remolona, 1992–93). One important implication of the model of Breeden and Viswanathan (1990) is that like financial institutions, industrial firms are likely to make much greater use of derivatives (than internal techniques) in order to indirectly communicate their managerial ability to operate in the derivatives market. The characteristics of the firms also have strong predictive power. In general, the empirical results indicate that the explanatory power of the characteristics of the firms is stronger for the degree of utilisation of external techniques. It would appear that previous empirical studies which focus on the usual set of derivatives to identify hedgers and non-hedgers can capture some of the effects they seek to measure. However, an important feature of the results of this study is the finding of strong cross-sectional variation in the characteristics of firms that hedge. Indeed, it is shown that the degree of usage of certain techniques is associated with an increase in the variability of certain financial measures. Thus contrary to the general view found in the finance literature, hedging does not always decrease the variability of the firm’s value. To the author’s knowledge, apart from the implications for leverage in hedging decisions and the concerns raised by Giddy and Dufey (1995), the issues which have been raised have not been explicitly addressed in theoretical and empirical work. As the firms do not hedge fully, it is possible that part of the observed variability reflects the effects of partial hedging. However, the maturity mis-match of exposures and derivatives will normally give rise to some degree of variability in financial measures.