Working Paper

Currency hedging and corporate governance: a cross-country analysis

Abstract: Corporate governance can provide mechanisms to effectively monitor the use of derivatives. Using a sample of firms from 34 countries over the period 1990 to 1999, I find that firms with strong governance use currency derivatives for value-maximizing reasons as established by theory. On the other hand, firms with weak governance use such derivatives mostly for managerial self-interests and selective hedging. These results are robust to using a sample of US firms, the use of foreign denominated debt as an alternative strategy to hedge currency risk, selection bias, and a possible endogeneity between hedging policies, corporate governance, and other financial policies. Overall, the results serve as the first comprehensive evidence on the impact of corporate governance on why firms use derivatives and consequently why they hedge.

Keywords: Corporate governance; Hedging (Finance); Derivative securities;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 2006

Number: 858