The Use of Foreign Currency Derivatives and Firm Market Value

George Allayannis · James Peter Weston

1,060 citations0/0 files storedReview of Financial Studies

No readable copy stored yet — this record is metadata only.

No open-access location is known for this record yet.

Literature note Cite in a project Citation map

Risk Management in Financial Firms Financial Markets and Investment Strategies Corporate Finance and Governance

Abstract

This paper examines the use of foreign currency derivatives (FCDs) by a sample of 720 large U.S. nonfinancial firms between 1990 and 1995 and its potential impact on firm value. Using Tobin's Q as an approximation of a firm's market valuation, we find a positive relationship between firm value and the use of FCDs. The hedging premium is statistically and economically significant mostly after 1993 and is on average 5.7\% of firm value. This result is robust to a) controls for size, profitability, leverage, growth opportunities, ability to access financial markets, industrial and geographical diversification, credit quality, industry classification (4-digit SIC), year-dummies and firm fixed-effects; b) the use of a weight-adjusted industry Tobin's Q and other measures of value, such as the market to book and the market to sales ratios; and, c) alternative estimation techniques that handle the potential impact of outliers. Using the ratio of foreign currency derivatives to foreign sales as a proxy for the percentage of exposure that a firm hedges, we observe a significant dispersion in our measure of the hedge ratio. In univariate tests we find a nonlinear relationship between Q and our proxy. However, firm-specific factors explain this relationship in multivariate tests and it appears that firms are hedging optimally.

Paper brief

Loading…

Cite this work

Citation unavailable for this work.

BibTeX RIS CSL-JSON

No public copy is stored for this record, so only the metadata is cited.

Citations in this library

Citation map →

Stored only when both papers are in the corpus — 1,060 citations exist upstream.

References

1937The Nature of the Firm 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1977Determinants of corporate borrowing 1996Agency costs of free cash flow, corporate finance, and takeovers 1996Higher market valuation of companies with a small board of directors 1992The investment opportunity set and corporate financing, dividend, and compensation policies 1985The Determinants of Firms' Hedging Policies 1995Diversification's effect on firm value

Cited by

2003ADRs, Analysts, and Accuracy: Does Cross Listing in the United States Improve a Firm's Information Environment and Increase Market Value?2020Artificial intelligence and business models in the sustainable development goals perspective: A systematic literature review 2002Do Firms Hedge in Response to Tax Incentives?2008Effect of Service Transition Strategies on Firm Value 2011The Value of Enterprise Risk Management 2006Firm Value and Hedging: Evidence from U.S. Oil and Gas Producers

Explore the map →

Papers that cite the same references — the relational fallback while embeddings are still backfilling.

Imported from OpenAlex (CC0) — nothing here is generated.