The Determinants of Foreign Currency Hedging: Does Foreign Currency Debt Induce a Bias?

37 Pages Posted: 17 May 2006

See all articles by Amrit Judge

Amrit Judge

Middlesex University - Business School

Ephraim Clark

Middlesex University Business School

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Abstract

In this paper we use UK data to present strong empirical evidence that explains the mixed results in previous studies with respect to the effect of financial distress on the demand for corporate hedging. We build on recent studies that have identified a strong link between foreign currency (FC) debt use and leverage. Given this relationship, we show that using leverage variables as proxies for financial distress and the failure to distinguish between FC debt users and non-users causes misleading inference. More specifically, when we partition our sample of FC hedgers into firms that use and do not use foreign debt, we show that leverage variables are significantly related to the FC hedging decision for firms that use FC debt either in isolation or in combination with FC derivatives but not for firms that only use FC derivatives. This suggests that FC debt users are influencing these results. However, we also find that other financial distress cost proxies with no obvious link to FC debt use are significant determinants in the corporate demand for FC hedging, including derivatives use.

Keywords: Corporate hedging, foreign currency hedging, derivatives, financial distress, foreign currency debt

JEL Classification: F30, G32, G33

Suggested Citation

Judge, Amrit and Clark, Ephraim, The Determinants of Foreign Currency Hedging: Does Foreign Currency Debt Induce a Bias?. European Financial Management Journal, Forthcoming. Available at SSRN: https://ssrn.com/abstract=901995

Amrit Judge (Contact Author)

Middlesex University - Business School ( email )

The Burroughs
London, NW4 4BT
United Kingdom
020 8411 6344 (Phone)
020 8411 4739 (Fax)

HOME PAGE: http://mubs.mdx.ac.uk/Staff/Personal_pages/Amrit1/index.htm

Ephraim Clark

Middlesex University Business School ( email )

The Burroughs
London, NW4 4BT
United Kingdom

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