The determinants of the foreign exchange risk hedging practices of Saudi companies.
This thesis explores and examines the determinants of corporate hedging of exposure to changes in exchange rate. A new finance and contingency theory model of currency exposure management decision determinants is developed and tested by conducting a two stages survey of Saudi exporting and importing firms. This model suggests that the currency exposure of these firms is determined by four groups of forces. Finance theory is used to develop two explanations of why firms hedge. The first indicates that hedging increases firm value by reducing expected financial distress costs, agency conflicts, corporate finance costs, and the problem of underinvestment. A second explanation is that corporate hedging is attributable to managerial risk aversion. Contingency theory is used to develop two further explanations of why firms hedge. It suggest that the hedging decision is also dependent on the firm's need to hedge, and second on the firm's ability to hedge.The empirical side of this study consists of two stages. In the first stage, detailed interviews with fifteen risk management decision makers were undertaken to help in exploring and building the study framework. In the second stage the research model was tested using a sample of 83 responses from Saudi exporting and importing firms. This study found weak support for what previous studies identified as the determinants for hedging incentives and, further, suggests a new explanation regarding the role of finance theory factors in the hedging decision. It found strong support for the hypothesis that corporate hedging is affected, by managerial risk aversion. Our findings show that managers' characteristics appear to be more associated with corporate risk management than other organizational and environmental factors. According to the managerial risk aversion argument, firms which are controlled by owners, have monetary and equity compensation system, and have young managers, are more likely to hedge. In addition, the study found that contingency theory offers another two explanations for why companies hedge. The first explanation is that hedging decision depends on the firm's need to hedge. According to this explanation, firms with high levels of currency exposure, in specific industries, in competitive markets, and with operations highly sensitive to changes in exchange rates, are more likely to hedge. The second explanation is that the hedging decision depends on the firm's ability to hedge. Firms with qualified staff and risk management decision makers, more risk experience, risk management training programme, strong relationships with banks, more ability to bear the hedging costs, and active internal involvement of operating departments in risk management planning, will be more likely to hedge.
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Sheffield Hallam University (United Kingdom).