Family Business and Transaction Exposure

Khalil Nimer,Abdulhadi Ramadan,Mahmoud Nassar,Naser Abu Ghazaleh

doi:10.3390/joitmc6040129

Abstract

This study provides additional evidence and insight into theories on transaction exposure as it empirically examines the magnitude of transaction exposure in Kuwait, a developing country. Specifically, it investigates factors that might influence Kuwaiti firms’ responses to their transaction exposure and how being a family business or part of a family business group could play a mediating role in this response. Through conducting a questionnaire survey with the largest 147 industrial and commercial Kuwait firms, the results of a multinomial logistic regression indicate that theories on financial hedging seem to be inapplicable in the Kuwaiti case. However, these theories provide only partial explanations for management behavior in response to the transaction exposure of Kuwaiti companies. Findings show that a firm being part of a family business group is significantly correlated with its level of hedging, suggesting that firms that are members of a family group of businesses are expected to hedge at a higher level. This points to other theories, such as institutional theory, as playing greater roles in explaining the transaction exposure behaviors of firms in developing countries, and also suggests that family-controlled businesses are expected to engage in more innovative financial strategies and hedge at a higher level. The research findings imply that Kuwaiti firms need to be more aware of their transaction exposure and pay more attention to the related issues. Training programs in risk-management strategies should be provided to decision makers to help them evaluate the hedging strategies they employ. This study shows how different behaviors toward risk exist between firms that operate in developed and developing countries, including the effect of being part of a family business resulting in firms engaging in more innovative financial strategies when dealing with risk.

Highlights

Between 5 January 2002, and 19 May 2007, the Kuwaiti dinar (KD) was pegged to the US dollar (USD) at an exchange rate of KD 0.29963 per USD 1, with margins of plus or minus 3.5%
This study provides new evidence and insight into transaction-exposure risk-management (TERM) theories as it examines the magnitude of transaction exposure Kuwaiti firms face, the way these firms deal with this risk, and the factors that might affect their hedging levels
Based on the above discussion variable functional definitions, our research model would be as follows: AERM = α + β1FS/TS + β2FP/TP + β3FD/TD + β4FA + β5Size + β6 Nat + ε, where AERM is the accounting exposure risk-management level; FS/TS is the percentage of foreign sales to total sales; FD/TD is the percentage of foreign debt to total debt; foreign purchases to total purchases (FP/TP) is the percentage of foreign debt to total debt; Size is the firm size; and Nat is the nature of the company

Summary

Introduction

Between 5 January 2002, and 19 May 2007, the Kuwaiti dinar (KD) was pegged to the US dollar (USD) at an exchange rate of KD 0.29963 per USD 1, with margins of plus or minus 3.5%. After the USD depreciation against the major currencies during that time, the Central Bank of Kuwait decided, on 19 May 2007, to peg the KD to an undisclosed weighted basket of international currencies of Kuwait’s major trading and financial partner countries [1]. Following this transition, Kuwaiti exporters and importers were fundamentally exposed to higher levels of transaction exposure, whereas prior to this decision, they had been immune to fluctuations in the USD because of the pegging policy.

Methods

Results

Conclusion