The determinants of foreign exchange hedging in Alternative Investment Market firms

摘要

This paper examines the foreign exchange (FX) hedging by firms listed on the Alternative Investment Market (AIM) in the UK to contribute to the empirical debate on the determinants of the FX hedging. Despite our selection criteria that all our firms have exposure to FX risk, we find that only around a third of our sample hedge their FX risk. Contrary to expectations, we find a significant negative relation between hedging and the extent of managerial ownership of the firm. This could be explained by the particular agency relations in AIM firms, the significant managerial ownership of these firms or managers' overconfidence. We find that the larger of the AIM firms in our sample hedge more, indicating that despite the FX risks they face, some of the smaller AIM firms lack financial knowledge or understanding to deal with their potential FX risks. Finally, we find an industry effect in the decision to hedge as AIM firms in the basic material and financial sectors are less likely to hedge FX risk than other sectors Our results are robust to a number of further checks.