Openness, Hedging Incentives and Foreign Exchange Exposure: A Firm-Level Multi-Country Study

Journal of International Business Studies, Vol. 41, No. 1, pp. 105-122

41 Pages Posted: 11 Feb 2009 Last revised: 17 Dec 2009

See all articles by Elaine Hutson

Elaine Hutson

Monash University - Dept of Banking and Finance; Financial Research Network (FIRN)

Simon Stevenson

City University London - The Business School

Date Written: December 16, 2009

Abstract

The benefits of openness to trade are well established, but the disadvantages of openness are less well understood. At the firm level, trade is the principal source of exposure to exchange rate movements, and exchange exposure can be moderated by a range of hedging techniques. In this paper we ask two questions. First, do firms in open economies bear higher levels of exchange exposure than those in more closed economies? Second, is a strong corporate governance environment - one in which managers are incentivised to maximise shareholder value by hedging - associated with reduced firm-level exchange exposure? Using a sample of 3,788 firms from 23 developed countries for the period 1984-2003, we show that the more open the economy the more exposed are its firms to exchange rate movements, and this relation holds after controlling for firm size, industry and several financial variables. We also find a strong inverse relation between a firm's exchange exposure and the extent of creditor protection in the country in which it is based. This is consistent with managers acting to reduce the likelihood of financial distress in countries where bankruptcy costs are high, and it underlines the importance of institutional incentives in encouraging value-enhancing risk management activities.

Keywords: Exchange risk pricing, firm exposure, foreign exchange management and risk, economic openness, openness to trade, corporate governance

JEL Classification: F31, G34

Suggested Citation

Hutson, Elaine and Stevenson, Simon, Openness, Hedging Incentives and Foreign Exchange Exposure: A Firm-Level Multi-Country Study (December 16, 2009). Journal of International Business Studies, Vol. 41, No. 1, pp. 105-122, Available at SSRN: https://ssrn.com/abstract=1340564

Elaine Hutson (Contact Author)

Monash University - Dept of Banking and Finance ( email )

PO Box 197
Caulfield East, Victoria 3145
Australia
+61399032110 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Simon Stevenson

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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