Söhnke M. Bartram and Gordon M. Bodnar
Based on basic financial models and reports in the business press, exchange rate movements are generally believed to affect the value of nonfinancial firms. In contrast, the…
Abstract
Purpose
Based on basic financial models and reports in the business press, exchange rate movements are generally believed to affect the value of nonfinancial firms. In contrast, the empirical research on nonfinancial firms typically produces fewer significant exposures estimates than researchers expect, independent of the sample studied and the methodology used, giving rise to a situation known as “the exposure puzzle”. To this end, this paper aims to systematically analyze the existing empirical evidence of the exposure phenomenon and to attempt to understand the possible source of the exposure puzzle.
Design/methodology/approach
The paper provides a survey of the existing research on the exposure phenomenon for nonfinancial firms. A simple model of exposure elasticity is also used to demonstrate the substantial impact of operational hedging on exposure elasticities. Furthermore, the evidence on the nature of firms’ financial derivative usage is considered.
Findings
It is suggested that the exposure puzzle may not be a problem of empirical methodology or sample selection as previous research has suggested, but is simply the result of the endogeneity of operative and financial hedging at the firm level. Given that empirical tests estimate exchange exposures net of corporate hedging, both firms with low gross exposures that do not need to hedge and firms with large gross exposures that employ one or several forms of hedging, may exhibit only weak exchange rate exposures net of hedging. Consequently, empirical tests yield only small percentages of firms with significant stock price exposures in almost any sample.
Originality/value
If firms react rationally to their exposures, most firms will either have no exposure to start with, or reduce their exposure to levels that may be too small to detect empirically. Consequently, the exposure puzzle may not be a problem with methodology or theory, but mainly the result of endogeneity of operative and financial hedging at the firm level.
Details
Keywords
Gordon M. Bodnar and Richard C. Marston
This study develops a model of foreign exchange exposure dependent on only three variables, the percentage of the firm's revenues and expenses denominated in foreign currency and…
Abstract
This study develops a model of foreign exchange exposure dependent on only three variables, the percentage of the firm's revenues and expenses denominated in foreign currency and its profit rate. The model demonstrates that foreign exchange exposure elasticities should be largest for pure exporting and importing firms, especially those with low profit margins. Exposure elasticities should be smaller for multinational firms that match their foreign currency revenues and costs. Such operational hedges may help to explain why previous studies have found low or negligible levels of exposure when they studied the sensitivity of share prices to foreign exchange rates.
This paper examines the determinants of corporate dividend policy in Jordan. The study uses a firm‐level panel data set of all publicly traded firms on the Amman Stock Exchange…
Abstract
This paper examines the determinants of corporate dividend policy in Jordan. The study uses a firm‐level panel data set of all publicly traded firms on the Amman Stock Exchange between 1989 and 2000. The study develops eight research hypotheses, which are used to represent the main theories of corporate dividends. A general‐to‐specific modeling approach is used to choose between the competing hypotheses. The study examines the determinants of the amount of dividends using Tobit specifications. The results suggest that the proportion of stocks held by insiders and state ownership significantly affect the amount of dividends paid. Size, age, and profitability of the firm seem to be determinant factors of corporate dividend policy in Jordan. The findings provide strong support for the agency costs hypothesis and are broadly consistent with the pecking order hypothesis. The results provide no support for the signaling hypothesis.
Details
Keywords
Ahmed Riahi‐Belkaoui and Ronald D. Picur
Discusses three theories on the link between multinationality and investment value (internalization, imperfect world capital markets and managerial objectives) and develops…
Abstract
Discusses three theories on the link between multinationality and investment value (internalization, imperfect world capital markets and managerial objectives) and develops hypotheses on its relationship with the informativeness of accounting earnings and levels of discretionary accruals. Tests them on 1994‐1998 data from a sample of US multinationals using regression techniques; and presents the results which suggest that the level of multinationality is positively related to the magnitude of discretionary accruals and to the informativeness of accounting earnings.
Details
Keywords
Jonathan A. Batten and Samanthala Hettihewa
Country‐specific information on risk management is increasingly important, not only for investors and decision makers in international markets but also, for those in national and…
Abstract
Country‐specific information on risk management is increasingly important, not only for investors and decision makers in international markets but also, for those in national and regional markets. This study reports the results of a cross‐sectional survey of risk management practice and derivatives use by a sample of Australian firms. Overall, the results suggest that firm‐specific factors appear to have some influence on risk management practice with the industry of the respondent being the most important, while the degree of international exposure has the least. Larger and more internationally exposed firms are likely to have more frequent reporting of derivatives use, and are more likely to use swaps and options to manage risks than other types of firms. Issues and implications for international firms are discussed.
Details
Keywords
Uglješa Stankov, Ulrike Gretzel and Viachaslau Filimonau
Using market-risk disclosures as an empirical context, and drawing on the diffusion of innovations (DOIs) model, this paper contributes new sociological perspectives to a…
Abstract
Using market-risk disclosures as an empirical context, and drawing on the diffusion of innovations (DOIs) model, this paper contributes new sociological perspectives to a theorization of compliance. We propose that stakeholder behaviors during accounting standard-setting discussion and adoption phases are motivated by social, political, and economic factors. These phases interrelate, and consequently, any analysis of managerial disclosure decisions benefit from considering them together, rather than in isolation, as is typical.
The authors use a mixed-methods design, including detailed analysis of semi-structured interviews (n = 26), constituents’ comment letters (n = 106), annual report disclosures (FTSE 350: firm-year observations n = 1,131), technical meetings, and standard-setting documents.
Results suggest that constituents initially supported introduction of a set of mandatory market-risk disclosures, but implied costs of the proposed and subsequently approved requirements outweighed perceived benefits and efficiencies. This study elaborates on these issues, exploring how and why a financial reporting innovation that stakeholders deemed technically inefficient was diffused. Although the authors were told that compulsion (i.e., forced-selection) dominates disclosure decisions, some freedom of choice remains, as evidenced by greater than 40% non-compliance during the first year of adoption. Respondents indicate that theoretically, market-risk disclosure adoption decisions rest on assessment of the costs of disclosure (e.g., preparation and competition) versus non-disclosure (e.g., litigation and reputation). Second-phase adoption is more straightforward because the costs of disclosure decrease over time.
Although mixed-methods research offers several advantages, self-selection bias, issues with coding reliability, and interviewer/interviewee bias are possible. It is impossible to achieve a truly holistic understanding of standard-setting, and therefore the authors acknowledge that findings are not generalizable, though the risks were minimized.
Recognizing that disclosure choices are not made in political and social vacuums, this study suggests that sociological perspectives such as innovation-diffusion inform a theory of compliance.
Details
Keywords
Aim of the present monograph is the economic analysis of the role of MNEs regarding globalisation and digital economy and in parallel there is a reference and examination of some…
Abstract
Aim of the present monograph is the economic analysis of the role of MNEs regarding globalisation and digital economy and in parallel there is a reference and examination of some legal aspects concerning MNEs, cyberspace and e‐commerce as the means of expression of the digital economy. The whole effort of the author is focused on the examination of various aspects of MNEs and their impact upon globalisation and vice versa and how and if we are moving towards a global digital economy.