Economic exposure to exchange rate risk and financial hedging: Influence of ownership as a governance mechanism

Sikarwar, Ekta and Gupta, Roopak Kumar (2019) Economic exposure to exchange rate risk and financial hedging: Influence of ownership as a governance mechanism. Journal of Economic Studies, 46 (4). pp. 965-984. ISSN 0144-3585

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Abstract

Purpose – The purpose of this paper is to examine the potential non-linear relationship between family ownership as a governance mechanism and exchange rate exposure of firms that use financial hedging. Design/methodology/approach – The exchange rate exposure is estimated using two-factor Jorion (1990) model for a sample of 312 Indian firms over the period from 2001 to 2016. The cross-sectional regression model isusedat the second stage to investigate the effects of family ownership on exposure forthe firms that use currency derivatives. Findings – The results suggest a significant non-linear cubic relationship between family ownership and exchange rate exposure.Exchange rate exposure increases with family ownership at low and high levels(asa result of improper hedging) and decreases with family ownership at intermediate levels (as a consequence of value-enhancing hedging). Practicalimplications – Thestudyhaspracticalsignificanceforfirmstounderstandthecircumstancesin which currency derivatives usage is ineffective in alleviating exposure. Firms that have high or low family ownership should integrate operational hedges with financial hedges and should incorporate other firm-level governance mechanisms to avoid the misuse of derivatives. Originality/value – This study provides new evidence that the relationship between family ownership and exchange rate exposure is non-linear for firms that use financial hedging which has not been investigated before in the prior literature.

Item Type:	Article
Uncontrolled Keywords:	India; Family ownership; Exchange rate exposure; Financial hedging
Subjects:	Finance Finance > Financial Management/Corporate Finance
Divisions:	Finance and Strategy
Depositing User:	Mr. Muralidhara D
Date Deposited:	17 Mar 2020 06:20
Last Modified:	17 Mar 2020 06:20
URI:	http://tapmi.informaticsglobal.com/id/eprint/644

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