Do corporate hedge theories explain the natural hedge strategies of firms? A meta-analytic review.

Abstract

This meta-analysis of 54 empirical studies examines the determinants of natural hedging. Our findings reveal that firm’s risk exposure, economies of scale, and strategic considerations prompt natural hedge. Financial distress and underinvestment theory also partially explain the preference for natural hedge; however, their effect’s economic relevance is low. Factors influencing natural hedging differ across geographical regions and impact the choice of natural hedging strategies. For instance, highly profitable firms prefer foreign debt, whereas highly leveraged firms prefer operational modifications as natural hedge strategy. Data sources, model specifications, econometric methods, and journal rankings further explain heterogeneity in effect sizes across studies.