Corporate Hedging Theories and Usage of Foreign Currency Loans: A Logit Model Approach
Mahadevan Sriram and Srilakshminarayana Gali (2020). Corporate hedging theories and usage of foreign currency loans: a logit model approach. Investment Management and Financial Innovations, 17(4), 367-377. doi:10.21511/imfi.17(4).2020.31
12 Pages Posted: 27 Apr 2021
Date Written: November 16, 2020
The present study has attempted to discuss the association between corporate hedging theories and the usage of foreign currency loans by companies listed in India. A total of 349 non-financial companies were selected, and the data for the financial year ending 31st March, 2018 were considered for the analysis. The descriptive statistics indicate that 55% of the sample companies had borrowed funds in foreign currency. The companies were highly levered and maintained adequate short-term assets to honor short term obligations. A logit model was employed for analyzing the cross-sectional data. The dependent variable being binary (‘0’ for non-user of foreign currency loans and ‘1’ for foreign currency loan user), the study found the variable ‘industry type’ to have a significant association with usage of foreign currency loans. Companies from the manufacturing sector were likely to use foreign currency loans than companies from the services sector. Debt to net worth, export to sales, revenue (log of revenue) were the variables that significantly influenced the likelihood of companies raising foreign currency loans. Interest coverage ratio had a negative influence on the likelihood of companies opting for foreign currency loans. Hosmer and Lemeshow test showed that the model is a good fit indicating 73% accuracy in predicting the users of foreign currency loans as ‘foreign currency loan users’. Theories such as financial distress, size, and extent of international operations explain why companies raise foreign currency loans.
Keywords: logit model, debt to net worth, export to sales, revenue, financial distress, size and international operations, interest coverage ratio, India
JEL Classification: G32, G39, G30
Suggested Citation: Suggested Citation