relationship is tested by using the coefficient of variation of: i sales to market value SALESMV; ii the firm’s book value to its market value BOOKMV; and iii
dividend yield. Here, a negative relationship between the degree of utilisation of derivatives and our growth option measures is expected. Following DeMarzo and
Duffie 1995, high quality managers are more likely to hedge. But the choice of hedging technique and the type of exposure that is hedged can reflect managers’
perceptions of the economic effects of hedging. Titman 1992 also shows that a firm that has an optimistic outlook can use interest rate swaps to benefit from borrowing
and the expected cost of financial distress will not increase. Thus a positive relationship is predicted between the use of cross-currency interest rate swaps and
variability of the leverage measures.
The tax treatment of both the exposure and the hedging technique can have important implications for the firm’s hedging strategy see Kramer et al., 1993. Under
UK tax laws, the use of derivatives to hedge translation exposure may give rise to cash flow gains which are taxable and losses which are not tax allowable see Buckley,
1992. To avoid the adverse impacts of asymmetry in taxation, firms are likely to place more emphasis on internal techniques when hedging translation exposure. The use
of forward contracts to hedge the transaction exposure emanating from re6enue transactions, results in taxabletax allowable gains and losses in the UK. All those
impacts will in turn affect the level of profitability. Assuming that the tax credits can be utilised, a lower degree of variability is expected on the tax measures for firms
that use forward contracts to hedge transaction exposure. The tax and profitability measures are the coefficient of variation of: i tax charge on profitloss to pre-tax
profitloss TAXRATIO; ii tax charge on profit loss to market value TAXMV; iii operating profit to sales OPM; and iv trading profit to sales TPM.
The terms of managers’ and employees’ compensation plans can also impact on the choice of hedging technique see Smith, 1993. Managers will use those derivatives,
e.g. FX options, which increase the volatility of the firm’s stock price if a large part of their compensation is in the form of stock options. Following Smith and Stulz
1985 a positive relationship is expected between both managers’ and employees’ wealth and the extent to which the firms use derivatives, particularly when hedging
economic and translation exposures. The measures of wealth are the coefficient of variation of: i directors’ remuneration to market value DIRECMV; ii employees’
remuneration to market value EMPMV; and iii BOOKMV. The predictions are further summarised in Appendix A.
3. Empirical results
3
.
1
. Some general results Since the firms are large, one would expect them to make much greater use of
internal hedging techniques than external techniques. Further, much greater use of internal techniques would be expected because of the transaction cost, biased pricing,
default risk, etc. see Riehl and Rodriguez, 1977 that are associated with
N .L
. Joseph
J .
of Multi
. Fin
. Manag
.
10 2000
161 –
184
167
Table 1 Summary statistics for the extent to which hedging techniques are used by the firms
a
Hedging techniques Transaction exposure
Economic exposure Translation exposure
Percentage rating Percentage rating
Percentage rating Mean
1 3
N Mean
1 3
N N
Mean 1
3 Panel A. The degree of utilisation of internal hedging techniques by type of exposure
6.9 63
1.13 87.3
0.0 67
1.06 94.0
0.0 1.49
a Leads and lags 58.3
72 1.43
71.4 14.3
b Matching inflows and outflows with respect to timing of settlement 67
72 1.25
82.1 7.5
2.10 22.2
31.9 63
1.41 68.3
9.5 67
1.31 79.1
63 10.4
23.6 41.7
c Inter-company netting of foreign receipts and payments 72
2.18 62
73 1.40
69.4 9.7
66 1.14
89.4 3.0
2.11 24.7
35.6 d Domestic currency invoicing
1.31 79.0
9.7 66
1.03 98.5
1.5 e Adjustment clause in sales contract
73 1.67
46.6 13.7
62 1.47
63.3 10.0
64 1.67
53.1 60
20.3 11.3
f Assetliability management 71
1.54 57.7
g Transfer pricing agreements 1.13
70 88.3
1.7 65
1.03 96.9
0.0 1.41
61.4 2.9
60 Panel B. The degree of utilisation of external hedging techniques by type of exposure
33.3 68
1.79 50.0
29.4 71
2.38 21.1
59.2 72
a Foreign currency borrowinglending 1.94
38.9 1.75
47.8 22.4
68 1.53
61.8 67
14.7 74
b Forward exchange contracts 82.4
4.1 2.78
69 74
1.33 73.9
7.2 69
1.22 81.2
2.9 1.84
35.1 18.9
c Foreign exchange options 1.01
98.5 0.0
68 1.03
91.1 d Foreign exchange futures
0.0 73
1.07 94.5
1.4 67
1.03 97.1
0.0 –
– –
68 –
74 e Factoring bills receivable
2.7 82.4
1.20 69
74 1.42
69.6 11.6
70 1.46
68.6 14.3
1.34 75.7
9.5 f Cross-currency interest rate swaps
g Foreign currency swaps 1.46
74 65.2
11.6 70
1.64 57.1
21.4 1.65
54.1 18.9
69 1.09
91.3 0.0
69 1.07
94.2 69
1.4 78.4
1.4 h European currency unit
74 1.23
69 74
1.01 98.6
0.0 69
1.00 100.0
0.0 1.01
98.6 0.0
i Special drawing rights j Other currency blocs
1.07 74
94.2 1.4
69 1.04
95.7 0.0
1.20 85.1
5.4 69
1.17 88.4
5.8 69
1.10 92.8
2.9 69
k Government exchange risk guarantee, e.g. ECGD 74
1.36 68.9
5.4
a
The summary statistics relate to the scores obtained on a 3-point scale where 1 denotes not used; 2 denotes occasionally used; and 3 denotes frequently used.
external techniques. Table 1 shows that the degree of utilisation of internal and external hedging techniques varies with the type of exposure
6
. However, there is preliminary evidence to suggest that the firms place more emphasis on certain external
techniques — a finding which has been noted elsewhere see McRae and Walker, 1980, p. 101. In particular, Panel A shows that inter-company netting and domestic
currency invoicing in that order are the most commonly used techniques when hedging transaction exposure. Matching inflowsoutflows and assetliability manage-
ment are respectively the most commonly used techniques when hedging economic and translation exposures. Evidence from Khoury and Chan 1988 shows that
matching is the most popular internal technique used by US firms. Here, US firms consider matching to be the most flexible and ‘self-reliant’ way to hedge.
Panel B also shows that the firms use a limited set of external techniques to hedge the exposures. The FX forward contract is the most commonly used hedging
technique. This finding is similar for US firms see Phillips, 1995. Forward contracts are mainly used to hedge transaction exposure. While foreign currency borrowing
lending is the most commonly used technique when hedging both economic and translation exposures, it is the second most commonly used technique when hedging
transaction exposure. The use of foreign currency borrowinglending may reflect the desire of the firms to reduce the amount of investment that is abroad see Belk and
Glaum, 1990, but the degree of usage is stronger for translation exposure than for economic exposure. Cross-currency interest rate swaps and foreign currency swaps
are not commonly use by the firms. This is consistent with the findings of Glaum and Belk 1992. The utilisation rates of both FX options and futures are low for
all types of exposures but FX options tend to be more widely used than FX futures see also Glaum and Belk, 1992; Phillips, 1995. The low utilisation of FX futures
may be due to the effects of daily resettlement which can adversely affect the liquidity of firms.
In general, external techniques appear to play a much more important role in hedging decisions then internal techniques. As the firms are large, scale economies
in the use of external techniques and the availability of skilled treasury personnel may contribute to their greater use see Geczy et al., 1997. However, the firms do not
appear to be very selective in their use of the techniques when hedging different types of exposures.
3
.
1
.
1
. Hedging exposures with similar internal techniques To test for a link between the utilisation rates of internal techniques, a x
2
test was applied
7
. The test was applied to determine whether or not: i the firms are selective
6
The 3-point scale identified the degree of usage as: 1 = not used; 2 = occasionally used; and, 3 = frequently used. The occasional use of hedging techniques may be associated with partial hedging
andor hedging strategies which reflect expected changes in the behaviour of the financial markets. Since the aim is to capture the degree of utilisation, it would appear that the use of a larger point scale would
not have altered the results see Lehmann and Hulbert, 1972.
7
The results where the statistical test yields a value whose associated probability under the null hypothesis is 5 or less P-value 5 0.05 are reported. This cut-off point is applied throughout this study
unless explicitly stated otherwise.
in their use of the hedging techniques; and ii certain techniques are perceived to have special attributes such that they would only be used to hedge specific
exposures. The null hypothesis that there is no difference in the utilisation rate of matching when the firms hedge transaction and economic exposures is rejected
x
4 2
= 13.996; P-value = 0.007. The contingency table suggests that the firms make
greater use of matching when hedging transaction exposure compared with eco- nomic exposure. For example, 32 of the 45 firms 71.11 that do not use matching
to hedge economic exposure, also use matching occasionally and frequently to hedge transaction exposure. Using the Cramer test statistic, C see Siegel and
Castellan, 1988 the association appears to be moderate C = 0.333. The null hypothesis of no difference in the degree of utilisation of matching when hedging
economic and translation exposures is also rejected x
4 2
= 33.668; C = 0.521; P-
value = 0.000. Here, 50 of the firms do not use matching to hedge translation exposure and 90.00 of those firms do not hedge economic exposure with this
technique either. However, the firms have a much stronger preference for inter- company netting when hedging transaction exposure compared with economic
exposure overallx
4 2
= 13.910; C = 0.332; P-value = 0.008. While 43 of the firms do
not use inter-company netting to hedge economic exposure, 72.10 of those firms hedge transaction exposure with inter-company netting. Similar inference can be
made for the use of assetliability management and leads and lags across exposures, but in general, the firms appear to prefer to use those techniques to hedge
transaction exposure.
3
.
1
.
2
. Hedging exposures with similar external techniques External techniques such as currency swaps and foreign currency borrowinglend-
ing, allow firms to borrow more cheaply than would otherwise have been possible. Those techniques also enable firms to reduce or eliminate the amount of their
foreign investments see Glaum and Belk, 1992. Cross-currency interest rate swaps also share those attributes. In general, if those techniques enable firms to reduce the
amount of their foreign investment, one would expect their use to be more strongly associated with economic and translation exposures. The x
2
test provided some support for this prediction. The null hypothesis of no difference in the degree of
utilisation of foreign currency borrowinglending when hedging economic and translation exposures is rejected overallx
4 2
= 16.904; C = 0.355; P-value = 0.002.
Of the 39 firms that hedge translation exposure with foreign currency borrowing lending, 35.89 of them frequently hedge economic exposure with the same
technique. However, more than half of those firms 21 out of 39 do not use foreign currency borrowinglending to hedge economic exposure. Thus it seems that the
firms prefer to hedge translation exposure with foreign currency borrowinglending. In contrast, the firms make much greater use of currency swaps when hedging
economic exposure compared with transaction exposure overall x
4 2
= 20.680; C =
0.387; P-value = 0.001 but most of the firms do not use cross-currency interest rate to hedge their exposures.
If managers believe that FX options provide a genuine hedge but see, Giddy and Dufey, 1995, they are more likely to use them to hedge economic and translation
exposures. The null hypothesis of no difference in the extent to which the firms use FX options to hedge economic and translation exposures cannot be rejected.
However, the null hypothesis can be rejected for transaction and translation exposures x
4 2
= 10.224; C = 0.272; P-value = 0.037. Here, FX options are primar-
ily used to hedge transaction exposure. Up to 37 of the 56 firms that do not use FX options to hedge translation exposure use the derivative to hedge transaction
exposure.
3
.
1
.
3
. Hedging transaction exposure with different techniques Since it is more difficult to match the maturity of derivatives with those of the
underlying economic and translation exposures, firms would be expected to make much greater use of internal techniques. Although, the preliminary evidence sug-
gests that the firms place a stronger emphasis on external techniques, the hypothe- sised relationships are directly tested here. The null hypothesis of no difference in
the extent to which the firms use foreign currency borrowinglending and assetli- ability management when hedging transaction exposure is easily rejected x
4 2
= 13.109; C of 0.308; P-value = 0.011. Thirty-nine firms do not use assetliability
management to hedge transaction exposure and more than half of those 56.41 do not use foreign currency borrowinglending either. Indeed, the contingency table
suggests that there is a stronger preference for foreign currency borrowinglending. The null hypothesis is also rejected for the extent to which forward contracts are
used compared with matching and domestic currency invoicing
8
. The results are similar for the extent to which the firms use FX options compared
with other internal techniques
9
.
8
The test statistics for the extent to which FX contracts and the relevant internal hedging techniques are used when hedging transaction exposure are as follows:
Use of FX forward contracts P-value
C x
4 2
Use of: 12.361
Matching 0.293
0.015 0.035
0.266 10.317
Domestic currency invoicing
9
The test statistics for the extent to which FX options and the relevant internal hedging techniques are used when hedging transaction exposure are as follows:
Use of FX options P-value
C Use of:
x
4 2
0.006 14.488
0.317 Leads and lags
13.858 Domestic currency invoicing
0.308 0.008
Transfer pricing arrangements 0.002
0.350 17.159
3
.
1
.
4
. Hedging economic exposure with different techniques Some significant results were also found for the degree of utilisation of certain
techniques when hedging economic exposure. For example, the null hypothesis for the degree of utilisation of foreign currency borrowinglending and assetliability
management is rejected x
4 2
= 24.199; C = 0.453; P-value = 0.000. Most of the 29
firms 86.21 that do not use foreign currency borrowinglending use assetliability management. The results are also significant for the relationship between the degree
of utilisation of: i FX options and certain internal techniques; and ii foreign currency swaps and certain internal techniques
10
. The relationships are weak to moderate and reflect the stronger emphasis on
external techniques.
3
.
1
.
5
. Hedging translation exposure with different techniques Evidence from Collier et al. 1990 indicates that some treasury managers of both
UK and US firms are concerned about the adverse impacts of translation risk on leverage, distributable reserves and the overall balance sheet value. One implication
of this finding is that managerial attitudes towards translation exposure would vary, particularly when firms are faced with hedging techniques which increase the
variability of those measures. The results indicate a moderate association between the degree of utilisation of foreign currency borrowinglending and assetliability
management x
4 2
= 15.525; C = 0.348, P-value = 0.004. The firms generally make
much greater use of foreign currency borrowinglending to hedge translation exposure. For example, of the 34 non-users of assetliability management, up to
61.77 of them are occasional 17.65 and frequent 44.12 users of foreign currency borrowinglending. Most firms that use forward contracts also use match-
10
The test statistics for the extent to which FX options and the relevant internal hedging techniques are used when hedging economic exposure are as follows:
Use of FX options x
4 2
Use of: C
P-value 10.027
0.004 Matching inflowsoutflows
0.282 21.674
Inter-company netting 0.415
0.000 0.046
Invoicing in domestic currency 0.279
9.667 11.695
0.312 Transfer pricing arrangements
0.020 For economic exposure, the test statistics for the extent to which foreign currency swaps and the relevant
internal hedging techniques are used are as follows: Use of foreign currency swaps
x
4 2
C Use of:
P-value 25.457
Inter-company netting 0.449
0.000 Domestic currency invoicing
0.025 11.186
0.300 14.817
0.351 0.005
Assetliability management
ing, inter-company netting and domestic currency invoicing
11
although the empha- sis on forward contracts is not strong. Similarly, the null hypothesis that there is no
difference in the degree of utilisation of foreign currency swaps and assetliability management is rejected x
4 2
= 12.275; C = 0.312; P-value = 0.015. In general, the
firms place a much weaker emphasis on translation exposure.
3
.
2
. Bi6ariate test of hedging techniques and firms
’
characteristics In this sub-section, the extent to which cross-sectional variation in the character-
istics of the firms can explain the degree of utilisation of the hedging techniques is assessed. The data for the characteristics of the firms is not normally distributed.
Therefore, the distribution-free Kruskal – Wallis statistic has been used. To illustrate the testing procedure, the test statistics associated with the use of FX options and
the characteristics of the 64 non-anonymous firms are shown for the case of transaction exposure see Table 2. If the degree of utilisation of FX options is
associated with the financial measures, one would expect to observe differences in the variability of the financial measures. The table shows, for example, that
frequent users of FX options exhibit less variability on dividend yield compared to both occasional and non-users; the associated Kruskal – Wallis test statistic is
significant P-value = 0.015. Thus the null hypothesis that the k samples are from identical populations with the similar medians can be rejected and it can be inferred
that the degree of usage is associated with differences in the variability of the measure.
3
.
2
.
1
. Internal hedging techniques and firms
’
characteristics In most cases, the degree of utilisation of internal techniques is positively related
with the measures of internationalisation. In the case of transaction exposure, the Kruskal – Wallis statistic indicated that both occasional and frequent users of
matching, domestic currency invoicing and transfer pricing tend to be larger in terms of both NCOUNT and NSUBS. As expected, a higher degree of internation-
alisation appears to be associated with an increase in the use of internal techniques. Similarly, firms that use inter-company netting are larger in terms of both measures,
but in addition, the magnitude of PERSALE is also larger. As expected, firms that use assetliability management to hedge transaction exposure exhibit less variability
on QAR. However, PERHEDGE and the leverage measures were not found to be
11
The test statistics for the extent to FX forward contracts and the relevant internal hedging techniques are used when hedging translation exposure are as
Use of FX forward contracts P-value
C x
4 2
Use of: 0.297
11.267 0.024
Matching inflowsoutflows 14.980
Inter-company netting 0.342
0.005 Domestic currency invoicing
0.025 0.297
11.106
N .L
. Joseph
J .
of Multi
. Fin
. Manag
.
10 2000
161 –
184
173
Table 2 The characteristics of the firms conditioned on the degree of utilisation of foreign exchange FX options when hedging transaction exposure
a
Test statistic Combined sample
FX options not used FX options occasionally used
FX options frequently used S.D.
N Mean
S.D. K–W
P-value N
Mean Mean
S.D. N
Mean S.D.
N
1
. Coefficient of 6ariation of financial measures 20
30.703 20.340
13 44.244
25.781 5.827
0.054 61
32.304 20.358
26.784 12.952
SALESMV 28
20.888 13
35.646 24.416
2.493 0.287
61 30.095
28.972 20
19.165 BOOKMV
28. 9.708
23.060 29.117
22. 13.894
20 27.199
16.017 8.416
0.015 58
29.567 19.621
32.047 25.750
16 Dividend
21 20.200
13.720 13
35.271 24.773
4.508 0.105
63 23.016
18.968 19.317
18.977 OPM
29 14.517
13 21.059
15.109 2.603
0.272 63
14.497 16.769
18.226 15.901
29 TPM
21 17.250
28.802 20
16.696 28
27.078 11.845
0.565 0.754
61 26.939
13.617 24.242
9.384 28
GCASHMV 18.280
13 39.969
21.817 1.671
0.434 61
CASHMV 45.314
20 22.682
51.367 28.036
28 43.472
10.322 13
14.865 11.833
0.991 0.609
63 16.583
16.280 21
10.428 QAR
29 10.112
16.739 13.148
21 9.447
13 11.733
9.026 1.478
0.477 63
13.046 8.834
13.720 8.154
29 WCR
17.561 13
39.226 CGEAR
41.907 21
2.760 0.252
63 25.334
25.622 24.529
19.517 29
19.906 19.565
13 47.102
39.092 0.867
0.647 63
34.537 39.158
29 26.108
IGEAR 21
40.627 24.208
33.631 13
56.070 43.403
2.268 0.322
61 LTBORMV
44.729 20
33.461 44.282
24.786 28
39.784 33.872
13 50.682
46.518 3.346
0.188 63
29.034 38.421
TLBOR 48.002
29 63.107
43.792 21
9.562 21
8.234 13
− 42.116
197.284 1.089
0.580 63
− 0.961
89.895 9.986
14.704 29
TAXRATIO 24.001
13 44.005
25.503 9.302
0.010 61
39.953 35.850
20. 22.237
TAXMV 28
11.547 24.803
30.267 21
17.575 13
41.375 28.508
4.022 0.134
62 30.836
20.894 25.072
17.869 28.
DIRECMV 28
31.666 21.041
13 40.627
19.813 4.073
0.131 61
32.396 18.860
EMPMV 28.058
20 13.386
2
. Internationalisation measures 117.719
14 63.286
87.848 2.368
45.400 0.306
NSUBS 73
56.178 101.195
25 85.444
34 61.176
34 20.147
16.500 14
36.000 27.016
8.188
0.017
73 22.164
20.725 17.160
NCOUNT 19.375
25 26.982
PERSALE 14
26 46.429
33.479 5.423
0.066 73
42.671 30.551
31.731 31.239
33 49.967
26.549 13
62.692 25.545
1.440 0.487
67 55.690
60.075 29
25.768 PERHEDGE
25 63.800
25.219
a
The summary statistics are conditioned on the degree of usage of foreign exchange options and are also given for the firms combined. The variable representing firm characteristics are described in the appendix. S.D. is the standard deviation. K–W is the Kruskal–Wallis test statistic which tests the null hypothesis that the characteristics of the
firms conditioned on the degree of usage have the same median. The P-values50.05 are show in bold. For both PERSALE and PERHEDGE, respondents were asked to tick one percentage value or range of values from [0], [1–10], [11–20]…[91–100]. None of the firms recorded a score of 0. The statistics reported are based on the mid-point of those
ranges. This table is for illustrative purposes only.
significantly associated with any hedging technique. The results for translation and economic exposure are insignificant and reflect the low priorities the firms give to
those exposures.
3
.
2
.
2
. External hedging techniques and firms
’
characteristics The Kruskal – Wallis test statistic also indicated that the use of external tech-
niques varies with the characteristics of the firms. One interesting result is that occasional users of currency lendingborrowing tend to hedge a much larger
percentage of PERHEDGE than frequent users, when transaction exposure is hedged. If firms partially hedge on the expectation of benefiting from FX trading
see Hakkarainen et al., 1998, it is possible that the percentage of exposure that is hedged as well as the degree of utilisation of certain techniques will vary. Firms that
frequently use FX forwards to hedge transaction exposure tend to exhibit much lower variability on CASHMV compared to occasional users. This result is
expected since the mis-match of the cash flows from the instrument and the underlying exposure would not occur, in the absence of default. The degree of
utilisation of FX forwards is also positively related to NCOUNT. Furthermore, the degree of utilisation of FX options is positively related to dividend yield, TAXMV
and NCOUNT as well as the length of time since the firms had established their formal corporate hedging policies. Thus it appears that greater experience in
exposure management see also Dolde, 1993 increases the firms’ confidence in using more complex techniques. Firms that are occasional and frequent users of
factoring tend to hedge a larger percentage of PERSALE. They are also larger in terms of NSUBS. All those considerations apply to transaction exposure.
The long-term nature of economic exposure presents special problems for firms such that those hedging techniques which reduce the amount of foreign investments
are likely to be preferred. Furthermore, the economic exposure arising from the long leads of growth options is likely to re-enforce the incentive to partially hedge.
In general, the results indicate that both occasional and frequent users of foreign currency borrowinglending exhibit lower variability on certain growth option
measures, i.e. BOOKMV and SALESMV. The degree of variability on those measures is lowest for frequent users. Further, the degree of utilisation is positively
related to PERSALE. It should be noted that firms that hedge more than 81 of their global exposure exhibit greater variability on SALESMV, BOOKMV and
dividend yield while firms that hedge less than 40 of global exposure exhibit the least variability on those measures. But the statistical results are not significant
P-values ] 0.060. However, there is the potential for the degree of utilisation to impact on the percentage of exposure that is hedged. Frequent users of FX options
tend to exhibit less variability on the growth option measures as well as GCASHMV, DIRECMV, EMPMV, while occasional users exhibit the highest level
of variability on those measures. Extending Smith’s 1993 argument, it had been suggested that the terms of managerial compensation would provide an incentive
for using FX options, forwards and futures particularly when hedging economic and translation exposures. The results suggest that the incentive to increase the
firms’ volatility is greater only for occasional users of FX options.
Finally, the results indicate that firms that use foreign currency borrowinglend- ing to hedge translation exposure exhibit less variability on OPM, IGEAR, and
LTBORMV. The lower variability of the leverage measures is unexpected. How- ever, firms that hedge less than 40 of their global exposure exhibit less variability
on both CGEAR and IGEAR while those that hedge between 41 and 80 of their global exposure exhibit more variability on those measures P-value 5 0.025. Thus
it appears that the extent to which exposure is hedged impacts on the hypothesised relationship. The use of foreign currency borrowinglending when hedging transla-
tion exposure is also positively related with NSUBS and PERSALE. While occa- sional users of foreign currency swaps exhibit greater variability on both OPM and
TAXMV, frequent users exhibit less variability on OPM. These contrasting results may be due to the inflexibility inherent in the use of foreign currency swap
agreements.
3
.
3
. Multi6ariate test of hedging techniques and firms
’
characteristics Bivariate tests tend to be weak since they do not allow for interactions among the
explanatory variables. To further assess the choice of hedging techniques, a logistic regression was applied. The dependent variable of the logistic regression is deter-
mined by using the ratings that represent the degree of usage. Here, the score of 1 not used is coded as 0 and, the scores of 2 and 3 occasionally and frequently
used are coded as 1. The existence of missing explanatory variables and the anonymous responses result in an overall sample size of 54 firms. To minimise the
potential problems of small sample size, we present the results for the models where: i at least 20 of the firms can be allocated to either group 0 or 1, a priori;
ii each empirical model outperforms a naive proportional chance model see Joy and Tollefson, 1975; and iii each model’s x
n 2
statistic is significant at the 5 0.05 level. No evidence was found that suspiciously large regression residuals had an
adverse effect on the estimated coefficients.
3
.
3
.
1
. Internal hedging techniques Panel A of Table 3 shows that the explanatory variables exhibit some discrimina-
tory power for the degree of utilisation of internal hedging techniques. Only the coefficients associated with transaction exposure are significant. As expected, the
use of internal techniques is positively related with measures of internationalisation. The use of leads and lags is positively related with the coefficients of both
SALESMV and NCOUNT but those coefficients are marginally significant. The coefficient value of 0.138 for SALESMV means that as its variability increases, all
else held constant, the likelihood that the firm will use leads and lags to hedging transaction exposure increases. In this case, each unit increase in the variability of
SALESMV increases the log odds by a factor of 1.148; that is, e
0.138
. EMPMV makes the greatest contribution to the explanatory power of the model and the
coefficient of PERHEDGE is always positive. Both EMPMV and DIRECMV have negative coefficients for leads and lags, and transfer pricing, respectively P-
value 5 0.05.
N .L
. Joseph
J .
of Multi
. Fin
. Manag
.
10 2000
161 –
184
176
Table 3 Logistic regression for the use of internal and external hedging techniques and the characteristics of the firms
a
Transaction exposure Domestic cur-
Coeff Coeff
R Leads and lags
R Transfer pricing
Coeff R
rency invoicing Panel A
:
Internal hedging techniques CASHMV
− 0.182
SALESMV −
0.065 −
0.186 −
0.148 −
0.251 −
0.038 EMPMV
0.020 0.070
0.027 LTBORMV
0.042 SALESMV
0.377 TAXMV
0.106 0.152
0.298 0.138
0.018 0.014
0.040 −
0.055 −
0.249 PERHEDGE
0.024 DIRECMV
0.120 0.122
0.027 NCOUNT
0.025 0.014
0.015 NCOUNT
0.071 Constant
0.400 Constant
− 1.254
− 0.402
1.182 0.023
0.754 0.382
PERHEDGE 0.050
0.019 −
4.179 Constant
1.516 Diagnostics
Statistics Diagnostics
Statistics Diagnostics
Statistics Model’s x
3 2
12.909 Model’s x
5 2
24.552 10.348
Model’s x
3 2
classified 88.980
classified 70.370
classified 75.930
S. Residuals 88.890
− 0.022
S. Residuals S. Residuals
− 0.051
N
1
, N
2
− 0.015
N
1
, N
2
30, 24 N
1
, N
2
32, 22 12.42
N .L
. Joseph
J .
of Multi
. Fin
. Manag
.
10 2000
161 –
184
177
Table 3 Continued Transaction exposure
Coeff Foreign
Currency Cross-currency
Coeff R
Factoring Coeff
R R
Coeff R
exchange borrowing
interest rate swaps
options lending
Panel B
:
External hedging techniques −
0.187 −
0.244 DIRECMV
− 0.120
GCASHMV −
0.308 −
0.321 TLBOR
TPM −
0.039 −
0.480 −
0.223 0.076
0.017 0.053
0.163 TAXMV
0.181 OPM
0.307 EMPMV
0.127 0.210
0.388 IGEAR
0.049 0.268
0.200 0.024
0.048 0.051
0.062 CASHMV
− 0.200
NSUBS 0.013
− 0.256
− 0.096
0.413 CASHMV
NCOUNT −
0.035 −
0.047 −
0.137 0.020
0.022 0.016
0.005 BOOKMV
0.095 0.118
PERSALE −
0.036 −
0.234 CASH
0.084 0.176
0.042 0.055
0.016 SALES
0.187 0.266
0.071 Constant
− 3.389
PERHEDGE 0.227
0.068 0.029
1.038 Constant
Constant −
1.242 0.934 1.246
Constant −
0.163 1.245 1.106
Diagnostic Statistics
Diagnostic Diagnostic
Statistics Statistics
Statistics Diagnostic
Model’s x
3 2
19.075 Model’s x
6 2
33.527 Model’s x
4 2
12.344 Model’sx
4 2
25.314 classified
87.040 classified
79.630 79.63
classified 87.040
classified S. Residuals
0.007 S. Residuals
− 0.099
S. Residuals −
0.121 S. Residuals
0.003 N
1
, N
2
43, 11 N
1
, N
2
41, 13 N
1
, N
2
18, 36 18, 36
N
1
, N
2
N .L
. Joseph
J .
of Multi
. Fin
. Manag
.
10 2000
161 –
184
178
Table 3 Continued Economic exposure
Translation exposure Coeff
R Currency bor-
Coeff Coeff
R Currency bor-
Foreign cur- Foreign ex-
R Coeff
R rowinglending
rowinglending change options
rency swaps 0.254
0.188 OPM
− 0.092
0.118 GCASHMV
− 0.363
OPM TPM
0.338 0.046
0.339 0.047
0.125 0.023
0.035 SALESMV
0.049 Dividend yield
0.251 CGEAR
− 0.041
− 0.093
− 0.382
OPM −
0.340 −
0.061 −
0.374 0.018
0.117 0.021
0.038 IGEAR
− 0.249
TAXMV 0.059
− 0.120
− 0.065
0.282 EMPMV
TAXRATIO 0.179
− 0.053
0.305 0.038
0.023 0.027
0.072 Constant
− 1.601
Constant PERSALE
0.026 0.149
NSUBS 0.151
1.049 0.219
0.015 0.007
0.714 0.862
PERHEDGE 0.038
0.225 Constant
− 0.447
0.019 0.619
Constant −
0.470 1.357
Diagnostics Statistics
Diagnostics Diagnostics
Statistics Statistics
Diagnostics Statistics
Model’s x
5 2
20.915 Model’s x
4 2
13.597 28.689
Model’s x
3 2
6.108
b
Model’s x
3 2
classified 85.190
classified 72.220
a
classified 72.220
classified 75.930
S. Residuals −
0.016 S. Residuals
− 0.055
0.047 S. Residuals
− 0.017
S. Residuals N
1
, N
2
13, 41 N
1
, N
2
28, 26 N
1
, N
2
23, 31 N
1
, N
2
37, 17
a
The explanatory variables are entered intoremoved from the logistic regression using a stepwise procedure. The likelihood-ratio test is used for both entering cut-off P-value50.05 and removing cut-off P-value]0.10 the explanatory variables intofrom the model. For this reason some coefficients are significant at the 10 level, which is considered to be marginal. The Wald statistic is used to test the null
hypothesis that each coefficient of the model is zero. The standard errors of the coefficients are in parentheses. R is the partial correlation between the dependent and independent variables. S. Residuals is the average of the standardised residuals of the logistic regression model. For the ith case its residual is divided by
p
i
1−p
i
where p
i
is the predicted value. The chi-square x
n 2
statistic tests the null hypothesis that all coefficients in the model except the constant are simultaneously zero against the alternative that at least one coefficient is non-zero. The percentage correctly classified is a measure of the classificatory
efficiency of the model. The level of significance indicates that the classificatory efficiency of the empirical model is superior to that of a naive proportional chance model see, Joy and Tollefson, 1975. N
1
indicates the number of firms in the sample that do not use the hedging techniques while N
2
indicates the total number of occasional and frequent users. The results are presented where: i it was possible to allocate at least 20 of the firms to group 0 or 1 a priori; ii the percentage correctly classified by the empirical model outperforms a proportional chance naive model P-valueB0.05; one tailed; and
iii each model’s x
n 2
statistic is significant at the 5 level or less. The test statistic is significant at ]5 but 510 level.
The test statistic is significant at ]1 but 55. The test statistic is significant at 51 level.
3
.
3
.
2
. External hedging techniques The results for the degree of utilisation of external hedging techniques are shown
in Panel B of Table 3. Here, the degree of utilisation of foreign currency borrowing lending is associated with each type of exposure. The cash flow and profitability
measures appear to explain the degree of utilisation, and in most cases, their coefficients carry the expected sign. Notice that the coefficient for TAXMV is
positive implying that the use of FX options for hedging transaction exposure will increase as its variability increases. For transaction exposure, PERSALE carries an
unexpected negative sign for cross-currency interest rate swap, and is marginally significant but positive in the case of translation exposure. In general, the
characteristics of the firms can explain the choice of hedging technique but the explanatory power of the logistic regression is much stronger for the use of external
techniques.
4. Summary and conclusions
