Hedging Behavior in Small and Medium-Sized Enterprises: The Role of Unobserved Heterogeneity

53 Pages Posted: 24 May 2003

See all articles by Joost M. E. Pennings

Joost M. E. Pennings

Maastricht University; Wageningen UR

Philip Garcia

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

Abstract

We investigate factors that drive derivative usage in small and medium-sized enterprises (SMEs). The influence of these factors on hedging behavior cannot a priori be assumed equal for all SMEs. To address this heterogeneity, a generalized mixture regression model is used which classifies firms into segments, so that the hedging response to the determinants of derivative usage is the same within each segment. Using a unique data set of 415 SMEs, containing both accounting and experimental data, we find that factors like risk exposure, risk perception, risk attitude, and the decision-making unit, among others are useful in explaining hedging behavior. However, the effects of these factors are not homogeneous across all managers, and the roots of the heterogeneity can partially be traced to differences in attitudes, perceptions, and to differences in ownership structure.

Keywords: Derivatives Usage, Hedging Behavior, Unobserved Heterogeneity

JEL Classification: C1, G0

Suggested Citation

Pennings, Joost M. E. and Garcia, Philip, Hedging Behavior in Small and Medium-Sized Enterprises: The Role of Unobserved Heterogeneity. Available at SSRN: https://ssrn.com/abstract=393960 or http://dx.doi.org/10.2139/ssrn.393960

Joost M. E. Pennings (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

Wageningen UR ( email )

Hollandseweg 1
Wageningen, 6706KN
Netherlands

Philip Garcia

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics ( email )

1301 W. Gregory Drive
427 Mumford Hall
Urbana, IL 61801
United States
217-333-0644 (Phone)
217-333-5538 (Fax)

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