استفاده ترکیبی از بدهی خارجی و مشتقات ارز با خطر بحران ارز: درمورد شرکت های آمریکای لاتین

We investigate the determinants of firms' use of foreign currency derivatives in emerging markets exposed to currency crises. We develop a model where a firm with international orientation chooses its optimal foreign debt and hedging ratio. In the context of highly volatile exchange rate periods in five Latin American countries, we calibrate the model on ADRs. We find theoretical and empirical evidence that country specific factors (i.e. aggregate exposure of a country to a crisis) explain significantly part of our firms' foreign debt and hedging policy, as opposed to literature on firms in developed markets. We claim that derivative markets have been effective tools for firms in these countries, at least in the post-crisis era.

This work examines how and why foreign currency derivatives are used by large non-financial corporations which are both based in emerging markets and cross-listed in foreign developed markets. In general, firms use financial derivatives for hedging and speculative purposes. This should not be different in emerging markets. But firms based in these markets are attractive to investigate for two reasons at least. Firstly, the domestic currencies exhibit highly positive currency risk premia, with an impact on the cost of foreign exchange operations. Secondly, it is well-known that these firms use important proportions of foreign currency debt to finance their operations, with obvious implications on their decision to use currency derivatives for hedging and speculative purposes. These characteristics motivate our research. Given their fundamental choice to use foreign debt for their operations, and taking into account a framework where both firm and country specific variables can have a strong impact on results, how do firms in emerging markets use currency derivatives? Do they ignore these instruments? Do they use them steadily or selectively? And, in this latter case, what elements influence the decisions? To approach these questions, we first develop a theoretical model where a firm with international orientation chooses its optimal foreign debt and currency derivatives ratios sequentially. We link the first optimal choice to a long-term horizon and the second optimal choice to short-term motivations. This approach is in line with the observed average maturities of products available in the two markets. We consider that, apart from firm specific factors frequently invoked by the theory of hedging as it applies to developed markets, there are country specific factors such as the currency risk premia that will have an impact on firms' decisions when emerging economies are considered. The impact may be different when long-term financing needs are addressed and when short-term hedging and speculative motivations are taken into account. The model predicts that foreign debt will be used, instead of domestic debt, as well for long-term speculation, as for long-term hedging purposes. Currency derivatives will be used for adjusting the firms' long-term optimal exposure to short-term conditions. They will not be used for short-term speculation or short term hedging per se (independently of the long-term net exposure). It appears also that country-specific variables, such as the currency risk premia observed in the long-term and short-term segments of the financial market, will probably have an impact on the decisions. These predictions are tested using data from five Latin American countries during the turbulent period 2000–2002. This short time span encompasses three major currency crises and allows us to draw conclusions about the usefulness of foreign currency derivative markets for firms operating in such a volatile environment.2 There is extensive literature about why do firms use financial instruments for hedging.3 Among the benefits of using derivative contracts at a firm's level, one may emphasize the following: they permit firms to achieve payoffs they could otherwise attain only at a higher cost; they minimize accounting earnings volatility; and under certain conditions may increase firm value.4 More precisely, financial theory indicates that risk management increases firm value when there exist capital market imperfections. Examples can be bankruptcy costs and convex tax schedules as in Smith and Stulz (1985), underinvestment as in Bessembinder (1991) and Froot et al. (1993), either underinvestment or overinvestment as in Morellec and Smith (2002), agency conflicts as in Brown (2001), or managerial compensation as in DeMarzo and Duffie (1995). The intuition behind creation of firm value is that financial risk management can increase shareholder value when capital market imperfections provoke deadweight costs borne by shareholders. Additional theoretical motivations for hedging are presented by Mello and Parsons (2000) who evoke a liquidity impact on the hedging decision and Fehle and Tsyplakov (2005) and Purnanandam (2008) who link optimal hedging to proxies of financial distress, such as leverage. Most empirical studies about the motivations to use financial instruments focus on U.S. non-financial firms. They reveal that hedging is a primary motivation and they find out that it is associated to different firm specific elements. For example, Geczy, et al. (1997) show that there is a positive relationship between the use of currency derivatives and firms' growth opportunities. A speculative motivation arises, however, in the comparative survey by Bodnar and Gebhardt (1998), where a significant percentage of firms admit to enter in derivatives positions as a result of their market view. Beber and Fabbri (2006) confirm that U.S. firms adopt an active “market view” attitude. They also link corporate derivatives' use to different managerial characteristics. The effectiveness and importance of derivatives usage for hedging purposes is empirically challenged by Guay and Kothari (2003) who argue that positions account for very small percentages of firms' total cash flows.5 On the contrary, Allayannis et al. (2001) show that in the case of U.S. multinationals the use of currency derivatives significantly increases firm value. In accordance with this finding, on a sample of S&P 500 non-financial firms, Allayannis and Ofek (2001) show that derivatives' use significantly decreases the firms' exchange rate exposure. Guay (1999) focuses on firms' initiation year of using derivatives and suggests that there is a significant decrease in firm risk as well. As far as foreign debt is concerned, its use for hedging motives is confirmed by Kedia and Mozumdar (2003) and Elliott et al. (2003). Empirical research addressing the use of financial derivatives by non-U.S. firms6 supports evidence that hedging is the major motivation and that it is partially effective. Bartram et al. (2004) bring evidence of the use of derivatives by 7319 firms in 50 countries and claim that these tools are used in fact for risk management purposes rather than for speculation. There are also a few studies that insist on the interaction between foreign debt and currency derivatives choice at an empirical level,7 but with no clear-cut conclusion about whether these tools are substitutes or complements and why. For this reason, our study intends to close a gap in the literature by addressing this issue specifically in the context of markets where it arises quite clearly. The first study on corporate risk management in very volatile markets was by Allayannis et al. (2003). They focus on non financial firms from eight different developed and developing Asian countries around the crisis of 1997. They find that foreign debt is used for both hedging and speculative purposes. Concerning the ex post effectiveness of this policy, they point out a significant negative relationship between the use of foreign debt and firms' financial performance. They also find no significant difference in operational profits between users and non-users of derivatives. They claim that this surprising result could be due to derivative market illiquidity, increased counterparty risk and several credit constraints. It seems that derivative markets have become more liquid since the Asian crisis.8 Our objective is thus to examine more recent volatile periods, by addressing specifically the interactions between foreign debt and currency derivatives usage in an emerging market context. In short, the focus of our study is on large firms of emerging markets where financial stability is a crucial issue due to significant country currency risk premia. Our unique data set of firms concerns the volatile exchange rate environment in Argentina, Brazil, Chile, Mexico and Venezuela during the period 2000–2003. We show that for these firms, the choices of foreign debt in a long-term horizon and of currency derivatives in a short-term horizon are not independent. We decompose and identify the motives for each choice under the two broad categories of “hedging” and “speculation”. We find that rational expectations drive the use of the two financial instruments, since the foreign debt ratio and derivatives ratios decrease and increase, respectively, as the currency exposure increases, in the corresponding time horizon. The notion of exposure is decomposed by taking into account country factors, such as measures of the expected devaluation, as well as firm specific characteristics, such as elements of capital structure. We provide evidence that country specific variables are significant determinants of both control ratios. The significance of these factors as motivations for hedging gives us the chance to claim that derivatives markets have been useful as hedging tools, at least in post-crises periods in the developing countries of our sample. The paper is organized as follows. In the next Section, we present a simple theoretical framework where a cross-listed firm chooses its optimal foreign currency debt ratio as well as its optimal foreign currency derivatives ratio in a long-term and short-term horizon respectively. We interpret the optimal ratios based on the emerging market context and its implications. In Section 3, we explain the choice of our data and provide some descriptive statistics. We also present the estimations we use in order to obtain our proxies for certain country specific variables and we briefly expose our empirical methodology. Section 4 presents the results concerning the determinants for the use of the two types of financial instruments: foreign debt (FD) and foreign currency derivatives (FCD). It appears that foreign debt is used both for hedging purposes and for speculative purposes (to reduce the cost of debt). In contrast, the use of foreign derivatives is mainly motivated by hedging considerations, while speculation arises mainly in the post-crisis period. In both cases, various firm-specific and country-specific variables have an impact on the decision. The paper closes with some concluding remarks

This study sheds light on the use of foreign exchange financial tools among emerging market cross-listed firms. We develop a simple model suited for the different characteristics of ADR firms, such as relatively large size and international orientation. On a two-horizon decision making process, we obtain the firm's optimal foreign debt ratio β* and its optimal currency derivatives ratio γ∗. We link the first optimal choice to the long-term horizon and the second optimal choice to the short-term. Based on an emerging market context, we link both optimal choices to country currency risk premia for each corresponding time horizon. Both choices, thus, depend on firm as well as country specific factors, in particular the public expectations of devaluation in both time horizons. We calibrate our model using a unique data set on Latin American ADRs around the currency turmoils of 2000–2003 in five countries of the region. We are able to sustain the hypothesis that an ADR firm's optimal use of financial tools is a positive function of both its idiosyncratic and country exposure. We find that rational expectations assumptions hold for the use of both financial instruments, since β* and γ∗ decrease and increase respectively as the probability of devaluation of their corresponding time horizon increases. We provide evidence that the choice of the two types of instruments cannot be treated independently. We finally show that country specific variables are important determinants of β*, γ∗ for our emerging market sample, since their non-consideration creates a significant omitted-variable bias. The significance of country specific factors as motivations for hedging gives us the chance to assess that derivatives markets are able to act as a hedging tool in developing countries in turbulent periods, at least for the post-crisis era. Among the various firm specific determinants of β* and γ∗, most evidence from extensive developed markets literature and scarce emerging market work is confirmed in the case of β* (influence of long-term currency mismatch, firm size, liabilities horizon, liquidity and growth opportunities being the most significant). Evidence from the firm specific determinants of γ∗ suggests that foreign currency generating assets has a positive impact, due to the indirect effect of the long-term choice of β*. Summarizing the motivation of use of these two categories of tools, we decompose and identify the speculative and hedging motivating factors for each one. We find evidence that foreign debt is used for hedging and speculation in the long-term, whereas derivatives are used for short-term hedging purposes as well as adjusting the long-term and short-term speculative positions mostly in the post-crisis era and among firms in countries that suffered from a crisis. In concluding, one limitation of this study is that its results are not automatically applicable for small firms, due to the characteristics of our representative firm. Undoubtedly, this is a topic for further research where one could expand the motivation of use of such financial tools to exploring their impact on firms' operational performance and capital structure choice. Such analysis through a larger data set in a longer time series horizon would be useful so as to draw conclusions with wider confidence intervals about how risk management varies across regions and countries. The question of speculation versus hedging is topical and this study shows that both motivations are present in firms' use of financial tools in emerging markets. Studying derivatives markets and their accessibility by firms in emerging markets during difficult periods may help us bring together these firms' particular characteristics and needs with market characteristics, so as to make the latter more effective and the former better equipped for turbulent conditions.