Institutional Investors and Foreign Exchange Risk
43 Pages Posted: 15 Mar 2010 Last revised: 23 Jan 2011
Date Written: December 5, 2010
Financial institutions differ from individual investors both in their analytical ability and in their level of diversification. Their access to derivative markets is also superior compared to that enjoyed by individual investors. All these factors make institutional investors more capable of homemade hedging, and thus lead to an expectation that institutions are drawn to firms with higher foreign exchange risk. Our results support this expectation. We find that after controlling for previously documented determinants of institutional ownership, institutional investors on aggregate are drawn to FX exposure. These findings vary depending on whether the institution type is constrained in its risk-taking by the prudent man law.
Keywords: institutional investors, foreign exchange risk, homemade hedging
JEL Classification: G20, G32
Suggested Citation: Suggested Citation