Abstract
The purpose of this study is to examine the effect of agency costs on company hedging policies. This study use the concept of hedging policies derived from synchronizing foreign exchange derivatives based on agency theory and hedging with foreign exchange debt based on balancing theory. The novelty of this research is the application of the synthesis of agency theory and balancing theory as indicators of hedging policies. The hedging policy based on foreign exchange derivatives is synchronized with the hedging policy based on foreign debt. The population was companies listed on the Indonesia Stock Exchange (IDX) in 2012-2017. Using the purposive sampling method, 78 companies for each year from 2012 - 2017 were obtained with a total of 468 data. This research used a panel data regression method. The hypotheses were tested with the Hausman Test, which shows the best research model is the Fixed Effect Model. The results of the study concluded that financial distress and underinvestment had a significant positive effect on hedging policies, while business risk did not affect hedging policies because most companies had relatively low foreign sales. The findings of this study have theoretical implications that support agency and balancing theory.
Highlights
For multinational companies, access to capital in the global market will reduce the cost of equity and debt costs compared to domestic companies
The sampling method used in this study was purposive sampling (Greene, 2013), based on the following criteria: 1) Non-financial companies that have foreign debt as their hedging strategy; 2) the company has foreign exchange exposures arising from international transactions, export sales, foreign exchange assets, and liabilities, or has overseas subsidiaries; 3) the company has data relating to the measurement of agency costs
The higher Financial Distress encourages the adoption of corporate hedging policies.The effect of Underinvestment on Hedging Policy shows the direction of positive and significant coefficients
Summary
Access to capital in the global market will reduce the cost of equity and debt costs compared to domestic companies. Access to capital in global markets allows multinational companies to manage their debt ratios. Multinational companies are in a more advantageous position than domestic companies because cash flows are diversified internationally (Eiteman et al, 2010). Fluctuations in foreign exchange rates have the potential to have a negative impact on cash flow and shareholder value but can threaten the survival of the company concerned (Modigliani & Miller, 1958). To anticipate the negative impact of fluctuations in foreign exchange rates and protect the interests of shareholders, multinational companies adopt a hedging policy. Hedging as a financial strategy will guarantee that the value of foreign exchange used to pay (outflow) or the amount of foreign exchange that will be received (inflow) in the future will not be affected by changes in foreign exchange rate fluctuations (Faisal, 2011)
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