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Article
Publication date: 10 August 2012

Damir Tokic

The purpose of this paper is to explain the theory of speculation to corporate executives. It is important that corporate hedgers understand how bubbles develop to effectively…

1390

Abstract

Purpose

The purpose of this paper is to explain the theory of speculation to corporate executives. It is important that corporate hedgers understand how bubbles develop to effectively adjust their corporate hedging strategies. Since excess speculation is always the primary cause of all bubbles, it is mandatory that corporate executives understand the basics of speculation theory.

Design/methodology/approach

The paper uses the case of Southwest Airlines to illustrate how corporate hedging programs can fail in an environment of asset price bubbles. Further, it reviews key academic theoretical articles on speculation, with emphasis on applied concepts.

Findings

Corporate hedgers must recognize inflating bubbles and acknowledge the positive feedback trading. Corporate hedgers must refrain from becoming the positive feedback traders themselves. Corporate hedgers can hedge the speculative bubbles by having insurance in form of options against potential bubbles at all times.

Originality/value

The paper can be a valuable reference source for corporate managers with diverse educational and business backgrounds because it widely disseminates the theory that only the closed circle of the trading community and narrowly specialized researches practice and fully understand.

Details

Journal of Management Development, vol. 31 no. 8
Type: Research Article
ISSN: 0262-1711

Keywords

Article
Publication date: 23 January 2007

Tom Aabo

To investigate the extent to which finance managers in non‐financial firms speculate in the currency markets and particularly to investigate the effect of individual‐owners on…

Abstract

Purpose

To investigate the extent to which finance managers in non‐financial firms speculate in the currency markets and particularly to investigate the effect of individual‐owners on such speculation.

Design/methodology/approach

This paper uses survey data in order to analyse the extent of currency speculation in non‐financial firms. It uses survey data and publicly available data in an ordered probit regression analysis in order to analyse the decisive factors behind the extent of currency speculation in non‐financial firms.

Findings

Currency speculation is widespread among non‐financial firms and takes the form of selective hedging as well as speculation not related to the underlying business. The extent of speculation is positively related to the size of the firm, to the international involvement of the firm, and to the conservatism of its capital structure. If an individual (often the founder or a descendant of the founder) is the largest shareholder in the firm, the extent of such speculation is significantly reduced.

Research limitations/implications

The findings are based on Danish, non‐financial firms listed on the Copenhagen Stock Exchange.

Originality/value

The contribution of this paper is to provide evidence on the negative relationship between individual‐owners (ownership structure) and the extent of currency speculation in non‐financial firms and more generally to investigate the factors behind such speculation.

Details

International Journal of Managerial Finance, vol. 3 no. 1
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 13 December 2022

Affaf Asghar Butt, Sayyid Salman Rizavi, Mian Sajid Nazir and Aamer Shahzad

This study aims to examine the effect of corporate derivatives use on firm value and how the corporate governance index modifies this relationship.

Abstract

Purpose

This study aims to examine the effect of corporate derivatives use on firm value and how the corporate governance index modifies this relationship.

Design/methodology/approach

The sample consists of 219 nonfinancial firms on the Pakistan Stock Exchange (PSX) from 2011 to 2019. The study used ordinary least square regression with year and industry dummies for estimations. Multiple estimation models such as fixed/random effect, Fama–MacBeth and two-stage least squares (2SLS) are used for robustness. Finally, the PROCESS macro tool is used to estimate the effect of moderating the role of corporate governance (CG) as robustness.

Findings

The findings show that derivatives use has an inverse influence on firm value. The firms did not use derivatives as a risk management tool but for speculation motives. However, the corporate governance index significantly weakens this relationship. However, strong governance forces the managers to use derivatives for hedging purposes. The firm-specific factors, including size, age, leverage, cash, financial distress cost, dividend and growth opportunities, also significantly influence firm value. The findings are robust to the other estimation models.

Research limitations/implications

The findings indicate that emerging economies like Pakistan are more prone to agency problems. The strong corporate governance structure helps firms turn the speculative motive of derivatives use into hedging purposes and mitigate the agency issues.

Practical implications

This empirical evidence suggests that good governance structures can help improve the impact of derivative usage on firm value.

Originality/value

To the best of the author's knowledge, this is the first study that examines the conditional role of corporate governance on the derivatives–value relationship from the viewpoint of agency problem/speculative motive.

Details

South Asian Journal of Business Studies, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2398-628X

Keywords

Article
Publication date: 22 February 2011

Tom Aabo, Jochen Kuhn and Giovanna Zanotti

The purpose of this study is to explore the influence of founder families in medium‐sized manufacturing firms and to investigate the impact of such influence on risk management …

2612

Abstract

Purpose

The purpose of this study is to explore the influence of founder families in medium‐sized manufacturing firms and to investigate the impact of such influence on risk management – more specifically foreign exchange hedging and speculation.

Design/methodology/approach

This empirical study uses survey data and publicly available data for descriptive analysis and ordinary least squares/ordered regression analysis.

Findings

The authors find that two thirds of medium‐sized manufacturing firms are founder family firms in which the founder of the firm or members of his/her family are active in the management team, are members of the board of directors, and/or are shareholders of the firm. The study finds no difference between such founder family firms and other firms in terms of the use/non‐use decision related to foreign exchange derivatives but a marked difference in terms of the extent decision. Thus, founder family firms tend not only to hedge but also to speculate more extensively than other firms.

Research limitations/implications

The findings are based on medium‐sized manufacturing firms in Denmark.

Originality/value

This study provides empirical evidence on the influence of founder families in medium‐sized firms and adds to the sparse literature on the impact of founder family influence on risk management.

Details

International Journal of Managerial Finance, vol. 7 no. 1
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 27 November 2019

Andreas Hecht

This paper aims to identify how non-financial firms manage their interest rate (IR) exposure. IR risk is complex, as it comprises the unequal cash flow and fair value risk. The…

Abstract

Purpose

This paper aims to identify how non-financial firms manage their interest rate (IR) exposure. IR risk is complex, as it comprises the unequal cash flow and fair value risk. The paper is able to separate both risk types and investigate empirically how the exposure is composed and managed, and whether firms increase or decrease their exposure with derivative transactions.

Design/methodology/approach

The paper examines an unexplored regulatory environment that contains publicly reported IR exposure data on the firms’ exposures before and after hedging. The data were complemented by indicative interviews with four treasury executives of major German corporations, including two DAX-30 firms, to include professional opinions to validate the results.

Findings

The paper provides new empirical insights about how non-financial firms manage their interest rate exposure. It suggests that firms use hedging instruments to swap from fixed- to floating-rate positions predominantly in the short-to medium-term, and that 63 [37] per cent of IR firm exposure are managed using risk-decreasing [risk-increasing/-constant] strategies.

Practical implications

Interviewed treasury executives suggest that the advanced disclosures benefit various stakeholders, ranging from financial analysts and shareholders to potential investors through more meaningful analyses on firms’ risk management activities. Further, the treasury executives indicate that the new data granularity would enable firms to carry out unprecedented competitive analyses and thereby benchmark and improve their own risk management.

Originality/value

The paper is the first empirical study to analyze the interest rate activities of non-financial firms based on actually reported exposure data before and after hedging, rather than using proxy variables. In addition, the new data granularity enables a separate analysis of the cash flow and fair value risk to focus on the non-financial firms’ requirements.

Details

The Journal of Risk Finance, vol. 20 no. 5
Type: Research Article
ISSN: 1526-5943

Keywords

Book part
Publication date: 22 November 2016

Simon Grima, Frank Bezzina and Inna Romānova

Derivatives are nowadays widely used globally both for speculative and hedging purposes. However, as experience shows, inadequate use of derivatives may cause severe problems and…

Abstract

Derivatives are nowadays widely used globally both for speculative and hedging purposes. However, as experience shows, inadequate use of derivatives may cause severe problems and even bankruptcy of firms. Thus, it is essential to help organizations design a robust proactive governance and internal control structure, which will help to prevent new financial debacles and scandals when using derivatives. Taking into account the frequent use and the growing fraud caused by derivatives, the aim of the paper is to identify considerations for internal control important to ensure better governance of firms using derivatives. The main findings are based on an analysis of interviews that were conducted with experts directly or indirectly involved with derivatives from different European countries. The interviews were semistructured following the approach proposed by Patton (1990). An analysis of the data collected from the interviews was carried out using a thematic approach. The paper identifies and analyzes the main “sources” of derivatives misuse, including poor design and mis-categorization of instruments, convenience to blame derivatives, unsophisticated players, insufficient regulatory environment, poorly designed internal controls, inadequate communication, poor firm culture, etc. It also provides an extensive analysis of the main recommendation for internal control concerning awareness of derivatives design, the human aspects, regulations, communication, knowledge, and training. Sound internal controls could avoid new debacles without adding other restrictions to the market. Moreover, it provides recommendations for internal control important to ensure better governance of firms using derivatives.

Details

Contemporary Issues in Finance: Current Challenges from Across Europe
Type: Book
ISBN: 978-1-78635-907-0

Keywords

Article
Publication date: 12 November 2021

Andreas Hecht

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…

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.

Details

The Journal of Risk Finance, vol. 22 no. 5
Type: Research Article
ISSN: 1526-5943

Keywords

Article
Publication date: 29 June 2012

Tom Aabo, Marianna Andryeyeva Hansen and Christos Pantzalis

The purpose of this paper is to investigate how non‐finance departmental involvement in the management of exchange rate risks impacts the extent of foreign exchange speculation in…

3006

Abstract

Purpose

The purpose of this paper is to investigate how non‐finance departmental involvement in the management of exchange rate risks impacts the extent of foreign exchange speculation in non‐financial firms.

Design/methodology/approach

Non‐financial firms in a small open economy (Denmark) are surveyed to investigate the extent of foreign exchange speculation and how it is related to the degree of nonfinance departmental involvement in the management of exchange rate risks. The authors employ binary and ordered probit regression analysis.

Findings

A positive link is found between the extent to which departments other than the finance department are involved in the management of exchange rate risks; and second, the extent to which the firm is likely to speculate – whether in the form of selective hedging or active speculation – on the foreign exchange market.

Practical implications

The findings indicate that the trend towards a more integrated risk management approach in which the finance department is not the only department responsible for risk management may have the (unforeseen) consequence that foreign exchange speculation increases.

Originality/value

The paper's findings are important because the link between the extent of foreign exchange speculation and a more integrated risk management approach has not been addressed previously.

Article
Publication date: 21 November 2014

Christina E. Bannier, Thomas Heidorn and Heinz-Dieter Vogel

This paper aims to provide an overview of the market for corporate and sovereign credit default swaps (CDS), with particular focus on Europe. It studies whether the subprime…

Abstract

Purpose

This paper aims to provide an overview of the market for corporate and sovereign credit default swaps (CDS), with particular focus on Europe. It studies whether the subprime crisis of 2007/2008 and, particularly, the European debt crisis 2009/2010 led to a differential development on corporate and sovereign CDS markets and investigates the primary use (speculative risk-trading or risk-hedging) of the two markets in recent years.

Design/methodology/approach

The authors use aggregate market data on the size of the respective markets and on the structure of market participants and their changes over time to assess the main research question. They enhance existing data from public sources such as the Bank for International Settlements and Depository Trust and Clearing Corporation with their own statistics on European sovereign CDS and combine their conclusions with observations regarding standardisation efforts and regulatory changes in the CDS market.

Findings

The authors show that after the subprime crisis 2007/2008 and the European debt crisis 2009/2010, the corporate and sovereign CDS markets developed quite differently. They provide evidence that since mid-2010, market participants started to use the sovereign CDS market more strongly for speculative purposes than for risk-hedging. This shows both in the shift of risk-quality of sovereign CDS contracts and in the changing structure of market participants. The ongoing standardisation and regulation in the CDS market – leading to further increases in transparency and reductions in transaction costs – may be expected to trigger a similar change also for corporate CDS.

Originality/value

Based on a broad variety of market infrastructure data, the authors show a diverging development of corporate and sovereign CDS markets in Europe in recent years. Particularly the sovereign CDS market appears to have shifted from a risk-hedging instrument to being used more strongly for speculative risk-trading. The authors combine their findings with recent regulatory action and market standardisation schemes and draw conclusions for the future development of CDS markets.

Details

The Journal of Risk Finance, vol. 15 no. 5
Type: Research Article
ISSN: 1526-5943

Keywords

Article
Publication date: 13 March 2017

Peihwang Wei, Li Xu and Bei Zeng

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…

1290

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.

Details

Managerial Finance, vol. 43 no. 3
Type: Research Article
ISSN: 0307-4358

Keywords

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