مصون سازی نرخ ارز و اداره شرکت ها : تجزیه و تحلیل متقابل کشور

This paper examines the impact of the strength of governance on firms' use of currency derivatives. Using a sample of firms from 30 countries over the period 1990 to 1999, we find that strongly governed firms tend to use derivatives to hedge currency exposure and overcome costly external financing. On the other hand, weakly governed firms appear to use derivatives mostly for managerial reasons. These results are robust to alternative measures of corporate governance, various subsamples, the use of foreign denominated debt as an alternative strategy to hedge currency exposure, and a potential selection bias. Overall, the results serve as the first comprehensive evidence of the impact of firm- and country-level corporate governance on firms' use of derivatives.

Risk management theory suggests agency conflicts can forge a link between corporate hedging activities and governance mechanisms. For example, managerial lack of diversification, reputation building, and protecting ‘pet’ projects have all been argued to influence corporate hedging policies (e.g., DeMarzo and Duffie, 1995, Smith and Stulz, 1985, Stulz, 1984 and Tufano, 1998). However, empirical evidence on the impact of agency conflicts that arise from ownership structures and executive compensation policies on corporate hedging activities, which focuses almost exclusively on U.S. firms, is limited and mixed. Indeed, since the United States enjoys a large and stable financial market with strong governance provisions, several important questions remain unanswered regarding how corporate governance influences hedging activities. This paper analyzes the impact of corporate governance on firms' use of currency derivatives in a cross-country setting.1 In particular, we hypothesize that weakly governed firms use derivatives for managerial reasons and selective hedging on average, and strongly governed firms use derivatives for other reasons established by the theory such as to overcome financial market frictions and to eliminate currency risk. We consider both firm-level governance mechanisms (e.g., ownership structures) and country-level governance mechanisms (e.g., investor protection rights), and use them to measure the degree of monitoring of managerial activities. The extant empirical literature uses derivatives as a proxy for corporate hedging activities. However, using this proxy is not uncontroversial as firms can use derivatives for hedging, speculation, or both.2 Survey evidence suggests that corporate use of derivatives for speculation is as likely as for hedging (Bodnar et al., 1998). Derivative contracts are particularly appealing to managers for speculation because of the leverage they can provide and the complexity in interpreting consequences of their use on firms' operations by investors due to limited disclosure in many countries. Thus, measuring hedging activities with derivative usage can create spurious results in testing corporate hedging theories. As a matter of fact, the existing literature provides mixed support for hedging theories. The strength of corporate governance can influence the use of derivatives in at least three ways. First, corporate governance can affect firms' decisions to use derivatives for hedging or selective hedging/speculation. Foreign exchange rates vary unpredictably and speculating on currency movements can result in significant transactions costs and trading losses for corporations (e.g., Leland, 1998 and Stulz, 1996). For example, Volkswagen lost about $1.5 billion in 2003 due to unhedged currency swings.3 Exposing the firm to such risky positions is less likely to take place in firms with higher transparency and better monitoring of managerial activities. Managers in firms with a weak monitoring environment have more discretion over their firms' activities and are less likely to be disciplined for any improper use (or non-use) of derivatives such as incorporating their personal subjective views into firms' hedging policies. Consistent with this argument, using survey data on the derivatives usage of U.S. firms, Geczy et al. (2007) find that weakly governed firms are more likely to report in the survey that they take a view with derivatives. Thus, we conjecture that firms with weak monitoring of managerial activities use derivatives to a greater extent for selective hedging on average than firms with strong monitoring of managerial activities. Second, shareholders use ex-ante governance mechanisms (e.g., executive compensation) and ex-post governance mechanisms (e.g., monitoring managerial activities) as substitutes in maximizing firm value. Firms with weak monitoring mechanisms can use derivatives to accommodate managerial risk preferences in designing executive compensation policies. For example, a manager's stock holdings and compensation in the firm and his human capital linked to the firm can incentivize him to avoid investing in long-term risky positive NPV projects (e.g., Almazan and Suarez, 2003). Shareholders can overcome this agency conflict by either allowing risk-averse managers to reduce the firm-specific risk or monitoring their actions. Some firms may opt for the former option if monitoring is costly for them. Since derivatives can lower a firm's risk, this argument implies that for firms with fewer monitoring mechanisms, there will be a more pronounced link between managerial risk preferences and derivative usage. Further, hedging can reduce the level of managerial compensation associated with bearing the additional firm-specific risk that can be hedged away, and increase the board of directors' ability to measure managerial performance by reducing the noise related to performance measures (DeMarzo and Duffie, 1995, Smith and Stulz, 1985 and Stulz, 1984). As a result, managers may have a greater incentive to hedge to reduce such noise in the firm's fundamentals, especially in opaque firms and where monitoring is more costly (e.g., Dadalt et al., 2002 and DeMarzo and Duffie, 1995). Thus, managerial reasons are more likely to subsume other incentives in firms with a weak monitoring environment on average in using currency derivatives. Third, hedging theories related to firms' financial policies (e.g., Froot et al., 1993) assume no managerial agency conflicts. However, managers do not always act in the best interest of shareholders. Empirical literature shows that a greater monitoring of managerial activities can reduce managerial agency conflicts (e.g., La Porta et al., 2002 and Mitton, 2002). Thus, firms with a greater monitoring of managerial activities can use derivatives to a greater extent as part of their financial policies, for example to overcome market frictions as in the model of Froot et al. (1993) for costly external financing and to eliminate currency risk. We examine the link between corporate governance and firms' use of derivatives using a natural laboratory, non-US firms. Corporate governance is potentially more problematic outside the U.S. due to less transparent markets and weak investor protection laws in some countries. A cross-country analysis provides a large cross-sectional variation in firms' governance provisions and derivative-related activities. It also allows us to exploit differences in country-level governance mechanisms that are exogenous to firms' use of derivatives and other financial policies. Therefore, analyzing firms' use of derivatives in a cross-country setting allows for more powerful tests of the relationship between corporate governance and derivative policies. However, a study of non-US firms' hedging activities is challenging because the disclosure of information on the use of derivatives is voluntary in most countries. For example, a report by the United Nations states that on average, only half the firms that use derivatives disclosed this information in their financial statements. 4 To overcome this potential reporting bias, we compile a dataset of derivative activities of foreign firms that are by law required to file with the SEC and reconcile with the US GAAP and FASB rules in their annual reports because their shares are traded on U.S. exchanges. This selection of firms mitigates the potential mismeasurement of corporate activities in derivatives due to voluntary reporting as well as controls for differences in accounting standards across countries. On the other hand, a disadvantage of a cross-country sample is that variation in country factors over time might influence hedging and make it more difficult to identify the impact of governance on hedging. 5 We document that the strength of corporate governance influences how firms use currency derivatives. Derivative usage in strongly governed firms is generally consistent with hedging theories related to costly external financing and with minimizing currency exposure. On the other hand, it is consistent with hedging theories related to managerial incentives in weakly governed firms. Specifically, we find evidence that firms with strong governance use currency derivatives more when the degree of currency exposure and the need for external financing are higher. For example, the percent of currency exposure hedged is 6.2 percentage points higher in firms with a greater monitoring of managerial activities, where the mean value of the percent of currency exposure hedged in the sample is 20.6%. Similarly, the likelihood of using currency derivatives is 56.1 percentage points higher in strongly governed firms compared to weakly governed firms. In addition, firms with weak governance use derivatives more when managers hold relatively more undiversified portfolios. The extent of using currency derivatives as a percent of foreign sales increases by 13.9 percentage points in firms with a weak monitoring of managerial activities when we move from the bottom quartile to the top quartile of the logarithm of the dollar value of managerial holdings. This finding is consistent with Tufano (1996), who finds that on average, managerial incentives influence the hedging policies of U.S. gold mining companies. In firms with a strong monitoring of managerial activities, on the other hand, the corresponding decrease is 1.3 percentage points. Overall, our results suggest that the strength of corporate governance has an important impact on corporate motives to use derivatives. We conduct an extensive set of additional tests to gauge the robustness of results. These tests include the potential endogeneity due to simultaneity between a firm's ownership and governance structure and its financial policies, and the impact of other potential concerns such as the joint determination of the use of currency derivatives and foreign denominated debt as well as a sample selection bias due to the fact that our sample firms are cross-listed on US exchanges. Apart from a few country-specific descriptive surveys of financial hedging such as Berkman and Bradbury (1996) for New Zealand firms, this paper is the first study to provide a cross-country evidence on corporate use of derivatives, and in particular the first to examine the effects of firm-level and country-level governance mechanisms on the corporate use of derivatives. A more recent paper by Bartram et al. (2009) examines the decision to use derivatives in a sample of international firms and finds that several firm-specific financial factors and the size of derivatives markets affect the probability of using derivatives. Unlike Bartram et al. (2009), we examine both the extent of using derivatives (a continuous variable) and the decision to use derivatives (a binary variable) to measure corporate derivative policies, and focus on the role of governance in shaping firms' hedging policies. The findings of this study underline the importance of taking into account the strength of governance in testing hedging theories and suggest that corporate governance may explain some of the ambiguity in the current empirical literature. For example, some studies find that managerial risk aversion is related to corporate hedging activities (e.g., Knopf et al., 2002 and Tufano, 1996) whereas some other studies do not (e.g., Haushalter, 2000). In this paper we find that managerial risk preferences affect hedging policies only in firms with weak governance. Another contribution of this paper is to show what type of firm is likely to use derivatives for selective hedging. Although there are several studies that provide evidence of firms' use of derivative for selective hedging (Adam and Fernando, 2006, Allayannis et al., 2003 and Faulkender, 2005), these papers do not show what firm characteristics determine such use of derivatives. We show that selective hedging is more common in firms with weak governance. Finally, this paper also contributes to the literature on the relationship between corporate governance and firm valuation, as our results indicate that one of the reasons for a positive relationship between strong governance and firm performance around financial crises is likely the impact of governance on hedging activities (e.g., Mitton, 2002). The remainder of the paper is organized as follows. Section 2 reviews hedging theories and Section 3 describes the data. The next section presents the empirical results. Section 5 deals with robustness tests. Section 6 concludes.

This paper examines the impact of corporate governance on firms' motives to use derivatives in a large cross-country sample. In this way, it attempts to broaden our understanding of why some firms hedge their exposure to foreign exchange risk and some do not, and how governance mechanisms influence corporate derivative usage. Exploiting the insight that managers may behave differently when their activities are not well-monitored, and shareholders can use corporate financial policies such as hedging to complement their governance mechanisms, we show that the degree of the monitoring of managerial activities has an important impact on firms' use of derivatives. Strongly governed firms tend to use currency derivatives to reduce their currency exposure and to overcome market frictions associated with costly external financing, and weakly governed firms appear to use derivatives for managerial reasons.