The determinants of Norwegian exporters' foreign exchange risk management

Richard Davies, Christian Ekeberg, Andrew Marshall

Research output: Contribution to journalArticle

12 Citations (Scopus)

Abstract

This paper examines foreign exchange (FX) hedging by Norwegian exporting firms to provide empirical evidence on the determinants of the hedging decision. The paper contributes to prior studies by, first, focusing on exporters to ensure that the companies in the sample have FX exposure, thereby allowing a more rigorous test of the theoretical determinants of hedging, and, secondly, in contrast to most previous studies that have focused on FX external hedging instruments, the use of both internal and external instruments is examined. Univariate, multivariate and multinominal analyses all provide evidence consistent with the firm value maximization hypotheses of underinvestment and risk aversion. Also, the following characteristics of firms - size, extent of internationalization and liquidity - are found to be related to the decision to hedge FX risk. However, the evidence on the links between the firm characteristics and the decision to hedge is not consistent across internal and external FX hedgers, and also varies for individual hedging instruments. Therefore it is argued that the empirical evidence on the theoretical determinants cannot be generalized to cover the full range of FX hedging strategies (which includes internal hedging instruments). Unlike empirical studies for other countries the evidence for Norwegian firms does not support the hypothesis that the avoidance of financial distress and the need to resort to external capital markets is a significant determinant of the hedging decision. Whilst the evidence suggests that country-specific factors may play a role in determining the use of FX hedging, it does not imply that the different policies adopted are necessarily inconsistent with the firm value maximization hypothesis.
LanguageEnglish
Pages217-240
Number of pages23
JournalEuropean Journal of Finance
Volume12
Issue number3
DOIs
Publication statusPublished - Apr 2006

Fingerprint

Risk management
Hedging
Exporters
Foreign exchange risk
Empirical evidence
Hedge
Firm value
Risk aversion
Empirical study
Resorts
Firm size
Internationalization
Capital markets
Avoidance
Firm characteristics
Liquidity
Foreign exchange
Specific factors
Underinvestment
Exporting

Keywords

  • hedging
  • theoretical determinants
  • internal and external
  • exporters
  • firm value

Cite this

Davies, Richard ; Ekeberg, Christian ; Marshall, Andrew. / The determinants of Norwegian exporters' foreign exchange risk management. In: European Journal of Finance. 2006 ; Vol. 12, No. 3. pp. 217-240.
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The determinants of Norwegian exporters' foreign exchange risk management. / Davies, Richard; Ekeberg, Christian; Marshall, Andrew.

In: European Journal of Finance, Vol. 12, No. 3, 04.2006, p. 217-240.

Research output: Contribution to journalArticle

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