Influence of financial distress on foreign exchange exposure

Aigbe Akhigbe (Department of Finance, University of Akron, Akron, Ohio, USA)
Anna D. Martin (Department of Economics and Finance, St John's University, New York, New York, USA)
Laurence J. Mauer (Department of Economics and Finance, St John's University, New York, New York, USA)

American Journal of Business

ISSN: 1935-5181

Publication date: 30 September 2014

Abstract

Purpose

The purpose of this paper is to investigate whether a non-monotonic relationship may exist between financial distress and foreign exchange (FX) exposure. The authors hypothesize that firms with higher FX exposures are those with the lowest levels of financial distress because the costs of hedging exceed the benefits and those with highest levels of financial distress due to the conflict of interest between shareholders and bondholders.

Design/methodology/approach

The methodology allows for the possibility of a non-monotonic relation between financial distress and FX exposure for firms known to have ex-ante exposures. The approach is to include a Black-Scholes-Merton financial distress measure and standard accounting-based financial distress measures.

Findings

The results support the hypothesis of a non-monotonic relationship between financial distress and exposure; companies with the lowest and highest levels of financial distress are willing to bear greater FX exposures.

Originality/value

The authors examine whether a non-monotonic relationship may exist between distress and FX exposure. Intuition for this non-monotonic relationship is provided by Stulz (1996) as he describes the risk management practices of firms with low, medium, and high default probabilities.

Keywords

Acknowledgements

JEL Classifications — F23, F31

The authors gratefully acknowledge the financial support from the Moyer endowment at the University of Akron and the Theis endowment at St John's University.

Citation

Akhigbe, A., D. Martin, A. and J. Mauer, L. (2014), "Influence of financial distress on foreign exchange exposure", American Journal of Business, Vol. 29 No. 3/4, pp. 223-236. https://doi.org/10.1108/AJB-07-2013-0054

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Publisher

:

Emerald Group Publishing Limited

Copyright © 2014, Emerald Group Publishing Limited

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