Using a sample of 622 companies in 25 countries over a four-year period (2003-2006), we investigate the translation risk hedging strategy of multinational companies. We find that a significant percentage of companies (47%) actively manage their translation risk. Hedgers are dominant in northern Europe, whereas non-hedgers prevail in southern Europe, South America and Asia. A credit rating significantly increases the likelihood of initiating and maintaining a hedging policy, as firms try to avoid translation losses that may increase leverage ratios and thus affect their rating. Accounting principles are also important because IFRS adopters hedge more than companies reporting exclusively through national principles. Hedgers adopt a variety of instruments from balance sheet hedging to derivatives. Derivatives are more common among United States GAAP adopters, whereas loans and mixed solutions are preferred among multinationals either adopting IFRS or local accounting principles. Our results show that the translation risk hedging decision is a long-term, persistent choice by companies.

Do firms hedge translation risks? / S. Bonini, M. Dallocchio, P. Raimbourg, A. Salvi. - In: JOURNAL OF FINANCIAL MANAGEMENT, MARKETS AND INSTITUTIONS. - ISSN 2282-717X. - 2016:2(2016), pp. 155-178. [10.12831/85435]

Do firms hedge translation risks?

S. Bonini
Primo
;
2016

Abstract

Using a sample of 622 companies in 25 countries over a four-year period (2003-2006), we investigate the translation risk hedging strategy of multinational companies. We find that a significant percentage of companies (47%) actively manage their translation risk. Hedgers are dominant in northern Europe, whereas non-hedgers prevail in southern Europe, South America and Asia. A credit rating significantly increases the likelihood of initiating and maintaining a hedging policy, as firms try to avoid translation losses that may increase leverage ratios and thus affect their rating. Accounting principles are also important because IFRS adopters hedge more than companies reporting exclusively through national principles. Hedgers adopt a variety of instruments from balance sheet hedging to derivatives. Derivatives are more common among United States GAAP adopters, whereas loans and mixed solutions are preferred among multinationals either adopting IFRS or local accounting principles. Our results show that the translation risk hedging decision is a long-term, persistent choice by companies.
Translation risk; hedging; derivatives
Settore SECS-P/11 - Economia degli Intermediari Finanziari
https://www.rivisteweb.it/doi/10.12831/85435
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/2434/782409
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