Determinants of foreign exchange risk management in Latin American firms

Abstract

Purpose: This study aims to identify whether Latin American (LA) firms are adopting any hedging strategy when designing Foreign Exchange Risk (FXR) measures. To that end, we explore the impact of several drivers of FXR management. Design/methodology/approach: The sample consists of 342 non-financial listed firms established in a group of representative countries of the LA region and covers the period from 2008 to 2016. Hypothesis testing is performed through a Logit model that measures the likelihood to adopt hedging practices. In addition, a Tobit test offers further insights into the derivatives users. Findings: We corroborate capital structure related hypotheses such as tax goals, financial distress, liquidity, and growth opportunities. In addition, both, ownership concentration and income tax payable seem to be negative and significant determinants of FXR coverage. Originality/value: Results reported in this study are relevant for the LA region with high tradition in raw materials and commodities exports. Our results show that LA firms still make limited use of derivatives and there is still much room for improvement. Hence, additional efforts to promote FXR hedging should be desirable, to meet authorities’ recommendations (OECD, World Bank, and IMF, 2007). Further research exploring Corporate Governance (CG) relationships and differences between large and small firms might be helpful.