The Determinants of Foreign Currency Hedging by UK Non-Financial Firms

Abstract

For 366 large non-financial UK firms, this paper reports the factors that are important in determining their decision to hedge foreign currency exposure. The results provide strong evidence of a relationship between expected financial distress costs and the foreign currency hedging decision and more significantly the foreign currency only hedging decision. These findings seem stronger than those found in similar studies using US data. The paper argues that this might be due to the fact that several US studies include in their non-hedging sample other hedging firms, such as firms using non-derivative methods for currency hedging and interest rate only hedgers, which might bias the results against the a priori expectations. However, it might also be due to a country specific institutional factor, that is, UK firms face higher expected costs of financial distress due to differences in the bankruptcy codes in the two countries.