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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Multinational Financial Management, Volume 22, Issue 4, October 2012, Pages 151–167
In this paper, we provide a re-examination of the exchange rate exposure and foreign currency derivative use by Australian resources firms in the 2006–2009 period which is characterized by increased volatility caused by the global financial crisis. In particular, we consider the interaction of a resources firm's exchange rate risk exposures, foreign currency derivative use and the global financial crisis simultaneously. Conforming to expectations, our results indicate that more companies are significantly exposed to exchange rate risk since the onset of the financial crisis. However, there is a lack of evidence that the use of foreign currency derivative is more effective in alleviating exchange rate exposures during the crisis as opposed to the pre-crisis period.
Exchange rate fluctuations have become a major source of risk to multinational corporations around the world since the collapse of the Bretton Woods system in the early 1970s. However, continuous innovations in financial markets and products have equipped corporations with a variety of tools to effectively manage their exchange rate (FX) exposures. As a matter of fact, exchange rate risk is one of the most widely hedged corporate risks. The popularity of foreign currency derivatives (FCD) as a hedging device provides an interesting reason for research that explores the relationship between FCD and FX exposure. Although not entirely unusual for empirical research, the existing evidence on the impact of FCD on corporate FX exposure is, however, nowhere near conclusive.1 More importantly, little research has been done to shed lights on the dynamic of the relationship. For example, it is unknown whether the FCD–FX exposure relationship is time varying and FCD is more effective in alleviating FX exposures in the situation of exchange rate shocks. From a financial management's perspective, it is also of utmost interest to gauge a better understanding of corporate behaviors in relation to their risk management practices when faced with unexpected changes in their exposure profile. Accordingly, in this paper, we aim to re-examine the relationship between corporate hedging through the use of FCD and its resultant impact on FX exposures. For reasons that will be explained shortly below, we choose to examine this important research question using a sample of Australian resources firms. In addition, we investigate whether the global financial crisis (GFC) had any impact on the dynamic of this relationship and how corporate risk management practices responded to unexpected changes in their level of FX exposures. In this respect, the paper enriches the literature surrounding the time varying property of FX exposures and its relationship with corporate usage of FCD. As highlighted above, we choose to re-examine this important empirical relationship by focusing on a sample of Australian resources firms during a period that encompasses the global financial crisis. Our sampling choice is based on a number of important considerations. First, the resources sector is the backbone of the Australian economy that accounts for substantial export revenues.2 In fact, the Australia's resources sector is the country's largest single export sector and it is recognized as a high quality resources supplier in the world. Second, and more importantly, resources firms tend to have better defined foreign exchange exposures than industrial firms. The reason for this is two-fold: resources firms are heavily export oriented with Australia being the world leading provider of many mining and metal products. In addition, commodities prices are often denominated in USD. As a result, resources companies commonly have exposure to fluctuations in the AUD/USD exchange rate.3 On the contrary, industrial firms are significantly more diverse in their operations and revenue structures and accordingly are less likely to have a relatively uniform set of exposures. The prevalence of FX exposure in the resources sector helps ensure that foreign currency derivatives FCD are generally used for hedging purposes as opposed to speculative reasons, a practice that can potentially cloud the relationship between exchange rate exposure and corporate use of FCD. The homogeneity of resources firms’ exposure profiles also underpins our sampling choice in light of the endogeneity issue highlighted by Aretz and Bartram (2010) and Bartram et al. (2011). Endogeneity, in the context of this paper, refers to the fact that corporate risk management practice through the use of FCD can impact exchange rate exposure. However, exchange rate exposure which is determined by a set of firm characteristics can simultaneously influence firm decision to use FCD. By focusing on a single industry where firm exposures are rather transparent and homogenous, we can be ascertained that any difference in firm exposure can be clearly attributed to differences in the risk management practices as opposed to differences in their ex-ante industry specific financial characteristics. Addressing endogeneity is of particular importance for research dealing with FX exposure as it has been established in the extant literature that FX exposure is an industry specific phenomenon ( Bodnar and Gentry, 1993, Shin and Soenen, 1999, He and Ng, 1998 and Nguyen and Faff, 2003). Our sampling choice, hence, enables us to document a more robust empirical relationship between FCD and exposure than previously documented.Another contribution of our paper lies in the examination of firm exposures and their corresponding FCD usage when faced with an exogenous FX shock brought about by the GFC. The GFC was responsible for a dramatic decline in the value of the AUD between 2007 and 2008.4 Factors contributing to this decline include interest rate cuts, a temporary weakening of commodity demand from China and the abandonment of the AUD by panicking investors. We hypothesize that such a large and sudden decline in the exchange rate would have a significant impact on the revenues and hence stock returns of resources firms.5 In particular, we predict that our sample firms would be more exposed to exchange rate fluctuations during the GFC. However, the existing literature surrounding FX exposures and FCD usage does not sufficiently explain the time varying role of FCD in alleviating FX exposures. As a result, whether FCD is more effective in alleviating FX exposures or not when faced with a FX shock, is a matter of empirical findings. Our results show that the majority of Australian resources firms are significantly exposed to FX risk. More interestingly, the number of firms suffering from significant FX exposures increased from 14.43% to 45.36% during the financial crisis. The extent of FX exposures time varies and appears to peak during the GFC. In response to the increased exposure, FCD users are found to intensify the extent of FCD usage although there is no substantial increase in the proportion of firms that make use of the instruments. This is a very interesting finding that strongly supports the economies of scale hypothesis underlying corporate derivative usage. In particular, intensifying exposures motivate hedgers to undertake a more aggressive hedging strategy. Nevertheless, an increase in exposures per se is not a sufficient condition for firms to adopt derivative instruments. The decision to use financial derivatives, documented in pioneering studies such as Nance et al. (1993) and Geczy et al. (1997) and confirmed in this current study, is primarily determined by firm size as larger firms are much more likely to have the financial and human resources to implement a comprehensive hedging strategy involving derivatives. Specific to this sample, we also unveil the role of growth opportunities, as measured by the price earnings (PE) ratio as the second most important motivating factors for firms to utilize FCD. We find some evidence that both the use and the extent of FCD are associated with a lower level of exposures when exposure is solely regressed against FCD usage. However, when considered in conjunction with other variables that affect a firm propensity to engage in hedging activities, FCD usage is overpowered by firm size as a predominant explanatory variable of the level of FX exposure. In particular, larger firms appear to have much less comparative exposure, a result that is plausibly an indication of how larger resources firms are better positioned to manage their exchange rate risk. While we were able to document an intensifying level of FCD usage in response to the exogenous shock caused by the GFC, conclusion cannot be drawn on whether the use of such instrument in alleviating exchange rate risk is more effective in one period compared to another. The remainder of this paper is structured as follows: in the next section, a review of the current literature on FX exposure and FCD usage is provided. Section 3 describes the sample selection and dataset followed by the econometric framework. Section 4 presents and discusses the results. Section 5 concludes
نتیجه گیری انگلیسی
In this paper we examine the FX exposures of a sample of Australian resources companies and how FCD use can potentially alleviate such exposures. Through an investigation of firm behavior in response to an exogenous exchange rate shock caused by the GFC, we accordingly contribute to the literature by offering findings in relation to the dynamic of the relationship between FX exposures and FCD usage. Our focus on resources companies offers several notable advantages. The resources industry is more homogenous than its industrial counterpart. Its component companies have exposure profiles that are more well-defined and transparent due to the nature of their operations. These industry-specific characteristics allow for a more robust test of the impact of FCD on FX exposures. Using an augmented market model to estimate FX exposures, a large population of Australian resources firms is found to have significant exposure to exchange rate movements. FX exposures, however, are time-varying with a significant increase in both the number of exposed firms and the absolute level of exposure during the GFC. In the presence of the increasing level of exposure, firms responded by using more FCD although the number of FCD users, if anything, appears to reduce slightly during the crisis. This finding offers an interesting insight into corporate risk management behavior. Increased exposure, per se, is not a sufficient condition for the adoption of financial derivatives. Rather, firm size seems to be a more powerful determinant of FCD usage. Consistent with the notion that the use of FCD is primarily for hedging purposes, there are some partial evidence that the use of FCD is associated with a reduction in firm FX risk despite the economic significance of the exposure reducing property of FCD during the crisis is relatively lower than before the crisis. To the extent that corporations monitor the effectiveness of their hedging strategy, it is expected that firms with significant FX exposure have changed their level of FCD use accordingly during the financial crisis. Nevertheless, there is not sufficient evidence to conclude that an increased level of FCD use results in lower FX exposure during the crisis. Taken together, we provide strong evidence that Australian resources firms on average are sensitive to exchange rate movement, particular so during periods of high volatility. However, having significant exchange rate exposure appears to be a characteristic of smaller firms. Large resources multinationals are associated with a lower level of exposures as they are more likely to engage in financial hedges employing FCD. Arguably, larger firms are also better positioned to undertake operational hedges that involve a combination of long term financing, marketing and investment strategies. An investigation of operational hedges is an interesting avenue for future research in a bid to gain a better understanding of the integrated risk management approach by the Australian resources sector.