Do Firms Hedge Translation Risk?

Dallocchio, Maurizio; Salvi, Antonio; Bonini, Stefano; Raimbourg, Philippe

doi:10.2139/ssrn.1063781

Cited by 3 publications

(3 citation statements)

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“…As translation adjustments account for a substantial part of OCI, and NI hedging is an important managerial tool with the ability to limit volatility of this OCI item, we fill the gap by examining whether the increased transparency of translation gains and losses resulted in a change in firm NI hedging behavior. While we expect greater transparency of OCI items to increase the use and degree of NI hedging, if a firm’s hedging choices are persistent (Bonini et al , 2016), firms that do not hedge will be unlikely to switch in response to the statement change alone.…”

Section: Prior Literature On Other Comprehensive Income and Related T...mentioning

confidence: 97%

“…It stands to reason that if increased transparency led to increased value relevance of OCI (Kim, 2017), particularly in the case of OCI losses, managers would be motivated to minimize volatility relating to those items outside of their control. While there is limited research on NI hedging specifically, there is evidence that firms exposed to translation risk hedge this risk, and the hedging decision is long-term and persistent (Bonini et al , 2016). As translation adjustments account for a substantial part of OCI, and NI hedging is an important managerial tool with the ability to limit volatility of this OCI item, we fill the gap by examining whether the increased transparency of translation gains and losses resulted in a change in firm NI hedging behavior.…”

Section: Prior Literature On Other Comprehensive Income and Related T...mentioning

confidence: 99%

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Has increased prominence of translation results changed net investment hedging practice?

Marshall,

Jin

2023

ARJ

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Purpose The purpose of this paper is to examine the impact of greater reporting prominence of translation results following Accounting Standard Update (ASU) 2011-05 on net investment (NI) hedging practice. The authors investigate the role of increased transparency on the decision to engage in NI hedging (participation), the degree of NI hedging (level) and the hedging vehicle choice. Design/methodology/approach This paper uses the Heckman two-stage procedure (Heckman, 1979) in the hedging choice analysis. In the first stage, the authors model the participation decision as a function of reporting transparency, translation results and other control variables. In the second stage, the authors include the Inverse Mills ratio from the first stage Probit to examine both the level and vehicle choice decisions. Findings When translation is reported more prominently, the authors find an increase in the level of NI hedging and a greater likelihood of debt as the hedging vehicle, but no evidence firms are more likely to hedge. Regardless of where translation results are reported, firms facing ongoing translation losses are more likely to hedge. Research limitations/implications This paper examines S&P 500 firms in the years surrounding the effective date of ASU 2011-05. The findings suggest managers respond to the increase in reporting transparency by increasing hedging for long-term risk management purposes, supporting accounting authorities’ efforts to promote other comprehensive income information transparency. The results should hold for comparable firms with similar currency exposure, size and visibility, but may not apply to smaller firms with limited translation exposure. As only about a quarter of firms with translation exposure engage in NI hedging, the primary results are based on a relatively limited number of firms. Originality/value To the best of the authors’ knowledge, this is the first study that examines NI hedging behavior changes following ASU-2011-05. Second, the authors are the first to explore why firms are almost equally split between derivatives and debt as their exclusive hedging vehicle.

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Section: Prior Literature On Other Comprehensive Income and Related T...mentioning

confidence: 97%

Section: Prior Literature On Other Comprehensive Income and Related T...mentioning

confidence: 99%

Has increased prominence of translation results changed net investment hedging practice?

Marshall,

Jin

2023

ARJ

View full text Add to dashboard Cite

show abstract

“…In terms of the relationship between accounting standards and risk management tools, a team of researchers Bonini, Dallocchio, Raimbourg, and Salvi (2016) found an interesting relationship that derivatives are more often used by businesses applying GAAP, while loans and mixed solutions are preferred by multinational corporations applying IFRS or national accounting standards. Martinez, Reinoso, Antonio, and Santos (2019) investigated an equally important relationship between the use of financial derivatives by non-financial corporations and the quality of tax policies.…”

Section: Problem Statementmentioning

confidence: 99%