The determinants of corporate FX speculation – Why firms increase risk
ISSN: 1526-5943
Article publication date: 12 November 2021
Issue publication date: 23 November 2021
Abstract
Purpose
Empirical evidence on the determinants of corporate FX speculation is ambiguous. We note that the conflicting findings of prior studies could be the result of different methodologies in determining speculation. Using a novel approach to defining speculative activities, we seek to help solve the puzzle of the determinants of speculation and examine which firms engage in such activities and why they do so.
Design/methodology/approach
This paper examines an unexplored regulatory environment that contains publicly reported FX risk data on the firms' exposures before and after hedging per year and currency. This unprecedented data granularity allows us to use actual reported volumes instead of proxy variables in defining speculation and to examine whether the convexity theories are empirically supported in FX risk management.
Findings
We find that frequent speculators are smaller, have more growth opportunities and possess lower internal resources, which indicates unprecedented empirical evidence for the convexity theories in FX risk management. Further, we provide evidence that corporate speculation might be linked to the application of hedge accounting.
Practical implications
We help solve the questions of which and why firms engage in speculative activities. This can provide valuable information to various stakeholders such as financial analysts, investors, or regulators, which can help prevent imperiling corporate losses and curb excessive speculative financial activities.
Originality/value
In order to question the unresolved issue of the determinants of speculation, this paper is the first to use openly available accounting data with actual reported FX exposure information before and after hedging in defining speculation, instead of relying on proxy variables for FX exposure and derivative usage with potential estimation errors.
Keywords
Acknowledgements
The authors sincerely thank the anonymous reviewer(s) for helpful comments on earlier drafts of the manuscript. The authors are particularly indebted to Martin Glaum, Tim Loughran, Mustafa Caglayan, Dirk Hachmeister, Niklas Lampenius and Alina Sigel for extensive discussions and valuable feedback. This paper has further benefited from the precious comments of the participants of the World Finance Conference 2017, the CARF-Conference 2017 in Lucerne as well as the 4th Finance Seminar of the University of Hohenheim in 2017. The authors gratefully acknowledge access to Bloomberg and the Compustat Global Vantage database provided by DALAHO, the University of Hohenheim.
Citation
Hecht, A. (2021), "The determinants of corporate FX speculation – Why firms increase risk", Journal of Risk Finance, Vol. 22 No. 5, pp. 363-383. https://doi.org/10.1108/JRF-07-2020-0153
Publisher
:Emerald Publishing Limited
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