Abstract
This study analyzes foreign currency hedging activity of U.S. multinational firms to determine if these firms hedge exchange rate risk to overcome an underinvestment problem. Previous research on this problem shows that firms' investment opportunities help to explain exchange rate risk hedging. This study uses more detailed, geographically segmented, firm-level data on hedging activity to test further implications of the underinvestment problem model. Evidence from this sample supports the conclusion that multinational firms with asset exposure to exchange rates hedge more and firms coordinate hedging and investment decisions.
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