Corporate hedging, firm focus and firm size: the case of REITs

Abstract

Purpose

The purpose of this paper is to investigate the substitutability of corporate hedging and diversification in the real estate investment trusts (REITs) industry. The authors hypothesize that, relative to diversified firms, focused firms are more likely to be associated with hedging. The role of firm size is also analyzed.

Design/methodology/approach

The logistic regression approach is utilized to analyze the probability of hedging and the panel regression approach is used to examine the amount of hedging.

Findings

The authors find that, relative to diversified firms, firms focused on a single property type are more likely to engage in hedging. However, this finding is significant only for smaller firms, which implies a non-linear relation between hedging and firm size. The evidence is not as strong when firm focus is measured by geographic concentration. In terms of hedging amount, smaller firms’ average hedge ratio is greater than that of larger firms. For either small or large firms group, hedging amounts increase with firm focus measured by either property or geographic concentration and increase with firm sizes.

Research limitations/implications

The results imply that, relative to diversified REITs, REITs focused on a single property type are more likely to engage in hedging. However, this finding is significant only for smaller firms, which implies a non-linear relation between hedging and firm size. The evidence is not as strong when firm focus is measured by geographic concentration, suggesting that geographic concentration is perceived to be less risky than property type concentration. For either small or large firms group, hedging amounts increase with firm focus measured by either property or geographic concentration and increase with firm sizes, which implies that hedging amount does not depend on firm size. The sample period is limited to the years 2010 to 2013 because some data needs to be manually collected.

Practical implications

The results imply that REITs consider both property diversification and hedging in managing their risk.

Originality/value

The research represents an early attempt to investigate the relation between corporate hedging and diversification. The investigation into the REIT industry has several advantages such as a lower likelihood of using derivatives for speculation.

Citation

Wei, P., Xu, L. and Zeng, B. (2017), "Corporate hedging, firm focus and firm size: the case of REITs", Managerial Finance, Vol. 43 No. 3, pp. 313-330. https://doi.org/10.1108/MF-05-2016-0134