Abstract
This paper examines the impact of the firm specific factors on the use of foreign exchange and interest derivative instruments for Malaysian firms. We find that firms’ foreign sales, growth options, managerial ownership and size have positive influence on the use of foreign exchange and interest derivatives in Malaysia. In particular, our results seem to suggest that Malaysian firms with higher level of foreign sales and growth opportunities are active users of the foreign currency derivatives, while, firms with higher ratio of quick assets do not use such derivatives, as these firms might use excess liquidity to absorb unpredicted changes in the foreign currency and interest rate risks. Our findings suggest that only a small number of Malaysian listed firms have appropriate understanding of the derivatives instruments to mitigate market risks in the international business environment. Most Malaysian managers seem to be risk averse and might not be aware of the upside of taking position in the derivatives markets.
Highlights
Risk management has been a matter of continuous concern to most corporations since the fall of Bretton Woods System in the middle of 1970s; in particular, the changes in the exchange rates have been a major risk to firms involved in the imports and exports (Bartram, 2008)
We argue that by including ownership variables, our paper builds on literature that have examined the effect of ownership structure on the determinants of risk management strategies and influence of managerial incentives and external monitoring on the decision to use derivatives
Consistent with previous studies, firms’ foreign sales, liquidity, growth options, managerial ownership and size are related to greater level of hedging
Summary
Risk management has been a matter of continuous concern to most corporations since the fall of Bretton Woods System in the middle of 1970s; in particular, the changes in the exchange rates have been a major risk to firms involved in the imports and exports (Bartram, 2008). Recently other market risks such as commodity risk, (see e.g., Lien and Yang, 2008; Alizadeh, Nomikos, and Pouliasis, 2008) and other non-financial risks such as information processing, technological, strategic and leadership risk (Linsley and Shrives, 2006) has become centre of attention. This empirical evidence regarding the choice of hedging instruments and determinants of foreign exchange risk hedging seems to reflect decision making of managers in the developed countries context which have found to have less information asymmetry, efficient market for corporate control, better institutional and legal systems.
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