Do Firms Hedge Translation Risks?

Journal of Financial Management, Markets and Institutions, forthcoming

39 Pages Posted: 6 Dec 2007 Last revised: 8 Sep 2020

See all articles by Stefano Bonini

Stefano Bonini

Stevens Institute of Technology - School of Business

Maurizio Dallocchio

Bocconi University - Department of Finance

Philippe Raimbourg

Université Paris I Panthéon-Sorbonne

Antonio Salvi

Jean Monnet University

Date Written: January 7, 2018

Abstract

Using a sample of 622 companies in 25 countries over a four-year period (2003–2006), we investigate the translation risk hedging strategy of multinational companies. We find that a significant percentage of companies (47%) actively manage their translation risk. A credit rating significantly increases the likelihood of initiating and maintaining a hedging policy, as firms try to avoid translation losses that may increase leverage ratios and thus affect their rating. Accounting principles are also important because IFRS adopters hedge more than companies reporting exclusively through national principles. Hedgers adopt a variety of instruments from balance sheet hedging to derivatives. Derivatives are more common among United States GAAP adopters, whereas loans and mixed solutions are preferred among multinationals either adopting IFRS or local accounting principles. Our results show that the translation risk hedging decision is a long-term, persistent choice by companies.

Keywords: Translation risk, hedging, derivatives

JEL Classification: F23, G31

Suggested Citation

Bonini, Stefano and Dallocchio, Maurizio and Raimbourg, Philippe and Salvi, Antonio, Do Firms Hedge Translation Risks? (January 7, 2018). Journal of Financial Management, Markets and Institutions, forthcoming, Available at SSRN: https://ssrn.com/abstract=1063781 or http://dx.doi.org/10.2139/ssrn.1063781

Stefano Bonini (Contact Author)

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

Maurizio Dallocchio

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Philippe Raimbourg

Université Paris I Panthéon-Sorbonne ( email )

12, place du Panthéon
Paris, IL
France
+33 1 40 46 27 62 (Phone)
+33 1 40 46 31 77 (Fax)

Antonio Salvi

Jean Monnet University ( email )

34, rue Francis Baulier
Saint-Etienne, 42023
France

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