The Use of Foreign Currency Derivatives, Corporate Governance, and Firm Value Around the World

40 Pages Posted: 17 Mar 2008 Last revised: 25 Jul 2018

See all articles by George Allayannis

George Allayannis

University of Virginia - Darden School of Business

Ugur Lel

University of Georgia - Department of Banking and Finance

Darius P. Miller

Southern Methodist University (SMU) - Finance Department

Date Written: September 30, 2011

Abstract

This paper examines the impact of currency derivatives on firm value using a broad sample of firms from thirty-nine countries with significant exchange-rate exposure. Derivatives can be used for managers’ self-interest, for hedging or for speculative purposes. We hypothesize that investors can appeal to a firm’s internal (firm-level) and external (country-level) corporate governance to draw inferences on a firm’s motive behind the use of derivatives, since well-governed firms are more likely to use derivatives to hedge rather than to speculate or pursue managers’ self-interest. Consistent with this explanation, we find strong evidence that the use of currency derivatives for firms that have strong internal firm-level or external country-level governance is associated with a significant value premium.

Keywords: Risk Management, Hedging, Corporate Governance, Firm Value

JEL Classification: G32, G34, F3

Suggested Citation

Allayannis, George and Lel, Ugur and Miller, Darius P., The Use of Foreign Currency Derivatives, Corporate Governance, and Firm Value Around the World (September 30, 2011). Darden Business School Working Paper No. 03-10. Available at SSRN: https://ssrn.com/abstract=460987 or http://dx.doi.org/10.2139/ssrn.460987

George Allayannis (Contact Author)

University of Virginia - Darden School of Business ( email )

Box 6550
Charlottesville, VA 22906-6550
United States
434-924-3434 (Phone)

HOME PAGE: http://faculty.darden.edu/allayannisy

Ugur Lel

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

Darius P. Miller

Southern Methodist University (SMU) - Finance Department ( email )

United States

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