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We investigate the relationship between CEO extraversion and the geographical dispersion of acquisitions within the U.S. The dispersion decision is important and has implications for employment, investments, and valuation. We show that extraverted CEOs prefer local deals and that the stock market favors local acquisitions made by extraverted CEOs. Our results support the notion that the extended and information-rich, local networks of extraverted CEOs as well as the agentic qualities of these CEOs facilitate the acquisition of local target firms. Our results are important in illuminating the channels through which extraverted CEOs make acquisitions and create value.

Udgivelsesdato: SEP This empirical study of the exchange rate exposure management of Danish non-financial firms listed on the Copenhagen Stock Exchange shows that debt denominated in foreign currency (foreign debt) is a very important alternative to the use of currency derivatives. The results show that the relative importance of foreign debt is positively related to (1) the extent of foreign subsidiaries, (2) the relative value of assets in place, and (3) the debt ratio. The pivotal role of time horizon is emphasised. These findings are important to firms in other countries with open economies.

PurposeThe purpose of this paper is to investigate the role of CEO narcissism in corporate acquisitions with a focus on frequency and size and furthermore to examine the subsequent stock market reaction.Design/methodology/approachThe authors investigate 751 acquisitions made by 158 UK nonfinancial firms and 202 CEOs in the 10-year period 2007–2016. The authors use the ratio of first-person singular pronouns to total first-person pronouns in CEO speech as the main proxy for CEO narcissism but the results are robust to the use of signature size and picture as alternative measures.FindingsThe authors find that increased CEO narcissism is associated with an increase in M&A expenditures, an increase in deal size and a decrease in deal frequency. Thus, the authors find that narcissistic CEOs favor size over frequency (“go big”). Furthermore, the authors find that the stock market reacts less favorably to acquisitions announced by firms run by narcissistic CEOs.Originality/valueThe paper contributes to upper echelon research by investigating the association between CEO narcissism and corporate decisions in a UK setting. More specifically, the paper contributes to the existing literature by investigating how CEO narcissism is associated with corporate acquisitions in terms of the size and frequency of deals and how such irrational behavior is penalized by the stock market. Previous literature has focused on the more broad association between CEO narcissism and M&A expenditures.

PurposeThe purpose of this paper is to investigate the role of narcissistic supply for the association between CEO narcissism and corporate risk taking.Design/methodology/approachThe authors investigate a sample of 281 non-financial S&P 1500 firms and a corresponding 457 CEOs in the 10-yr period 2006–2015.FindingsThe association between CEO narcissism and corporate risk taking depends on the admiration, attention, and affirmation of own superiority (“narcissistic supply”) that the CEO receives given her/his current position. Thus, a narcissistic CEO with an insufficient narcissistic supply (small firm/small compensation) will crave for more and take more risks (“rock the boat”) while a narcissistic CEO with a sufficient narcissistic supply (large firm/large compensation) will protect the status quo and be reluctant to take new risks. Specifically, the authors find that a change from a slightly narcissistic CEO to a strongly narcissistic CEO, for positions entailing limited (abundant) narcissistic supply, is associated with an increase (a decrease) in corporate risk of 6%–8% (11%–27%).Originality/valuePrevious research indicates a positive association between CEO narcissism and corporate risk taking in specific domains such as M&A and R&D activities. This paper provides a novel contribution to the existing literature by identifying and assessing the important role of narcissistic supply for the association between CEO narcissism and corporate risk taking in general.

Environmental, social, and governance (ESG) issues are important for consumers, investors, and other stakeholders. The same applies for gender diversity. We show that whether female CEOs seem to matter for the firm's ESG profile depends crucially on the data used for the analysis: depending on the specific data provider, ESG scores for the same firms are either strongly and significantly positively associated, or not associated at all, with having a female CEO. Conclusions on this important topic are vulnerable to data discrepancies across ESG data providers.

PurposeThe purpose of this study is to investigate the association between corporate risk and the interaction between CEO incentive compensation and CEO overconfidence.Design/methodology/approachThis empirical study performs random and fixed effect (FE) regression analysis. It uses option-implied measures of CEO overconfidence.FindingsThe authors contribute to the existing literature by showing (1) that the positive association between high CEO incentive compensation and corporate risk only exists in the sphere of overconfident CEOs and (2) that the positive association between overconfident CEOs and corporate risk only exists in the sphere of high CEO incentive compensation. The authors show that the combination of high CEO incentive compensation and CEO overconfidence is associated with an increase in corporate risk of approximately 6% while the individual effects are for all practical reasons negligible. The results imply that only the combination of high CEO incentive compensation and CEO overconfidence is associated with a significantly elevated level of corporate risk.Research limitations/implicationsThe findings are based on S&P 1500 non-financial firms in the period 2007–2016.Practical implicationsThe findings have important implications in terms of CEO selection and compensation.Originality/valueThis study provides empirical evidence on the importance of the dual presence of high CEO incentive compensation and CEO overconfidence for corporate risk. The previous literature has primarily investigated these phenomena in isolation.

We show that narcissistic CEOs are willing to sacrifice compensation for media coverage. The results of our study imply that firms with high media coverage exploit the narcissistic CEO’s desire for attention and acclaim by granting such a CEO a smaller monetary compensation. Our findings are important in understanding the interplay between CEO narcissism, CEO compensation, and the firm’s media coverage. Our results are statistically significant, robust, and economically meaningful.

External sourcing from foreign suppliers is an important aspect of the firm’s internationalization However, data on such sourcing is available from neither databases nor annual reports. Thus, the corporate risk implications of such sourcing have not been studied previously. We obtain the necessary data by surveying Scandinavian non-financial firms. We find that highly international firms reduce corporate risk by externally sourcing from foreign suppliers both compared to sourcing from own production facilities abroad (due to superior flexibility) and compared to domestic sourcing (due to off-setting cash flows). Our results are statistically significant, are economically meaningful, and have important policy implications. External sourcing from foreign suppliers is an important aspect of the firm's internationalization. However, data on such sourcing is available from neither databases nor annual reports. Thus, the corporate risk implications of such sourcing have not been studied previously. We obtain the necessary data by surveying Scandinavian non-financial firms. We find that highly international firms reduce corporate risk by externally sourcing from foreign suppliers both compared to sourcing from own production facilities abroad (due to superior flexibility) and compared to domestic sourcing (due to off-setting cash flows). Our results are statistically significant, are economically meaningful, and have important policy implications.

Purpose – The purpose of this paper is to investigate the role of narcissistic supply for the association between CEO narcissism and corporate risk taking. Design/methodology/design – The authors investigate a sample of 281 non-financial S&P 1500 firms and a corresponding 457 CEOs in the 10-year period 2006-2015. Findings – The association between CEO narcissism and corporate risk taking depends on the admiration, attention, and affirmation of own superiority (“narcissistic supply”) that the CEO receives given her/his current position. Thus, a narcissistic CEO with an insufficient narcissistic supply (small firm / small compensation) will crave for more and take more risks (“rock the boat”) while a narcissistic CEO with a sufficient narcissistic supply (large firm / large compensation) will protect the status quo and be reluctant to take new risks. Specifically, the authors find that a change from a slightly narcissistic CEO to a strongly narcissistic CEO, for positions entailing limited (abundant) narcissistic supply, is associated with an increase (a decrease) in corporate risk of 6%-8% (11%-27%). Originality/value – Previous research indicates a positive association between CEO narcissism and corporate risk taking in specific domains such as M&A and R&D activities. This paper provides a novel contribution to the existing literature by identifying and assessing the important role of narcissistic supply for the association between CEO narcissism and corporate risk taking in general.

Previous literature finds a positive association between short-term changes in institutional holdings (especially those of local institutions) and subsequent short-term stock performance. We contribute by investigating the importance of geographical proximity under policy uncertainty. We show that the short-term informational advantage of local institutions only thrives in areas that are either politically closely aligned with the president or where the state government (governorship and legislature) is under the control of one party. Our findings are important in understanding the avenues through which geographical proximity may provide the basis for exploitable informational advantages.

Previous studies have used the stock market approach to find the aggregate number of (firms with) foreign exchange exposures in a given country, region, or industry. Methodologies have differed in many aspects but two of the most basic differences relate to observation frequency and the choice of market index. Aggregate numbers have been shown to be (marginally) sensitive to the methodology employed. However, a corporate manager, an investor, or a stock analyst following a specific firm is not interested in the sensitivity on an aggregated level but on a firm-specific level. If the results for a specific firm are robust across methodologies, the corporate manager, the investor, or the stock analyst will rely on such results to a larger extent that if the results are highly sensitive to e.g. a change in observation frequency. We apply firm-specific sensitivity analysis to Scandinavian non-financial firms and find limited consistency in the detected exchange rate exposures when altering methodology in terms of observation frequency and choice of market index. The results put a question mark to the validity of the stock market approach for exchange rate exposure identification at the firm-specific level. Previous studies have used the stock market approach to find the aggregate number of (firms with) foreign exchange exposures in a given country, region, or industry. Methodologies have differed in many aspects but two of the most basic differences relate to observation frequency and the choice of market index. Aggregate numbers have been shown to be (marginally) sensitive to the methodology employed. However, a corporate manager, an investor, or a stock analyst following a specific firm is not interested in the sensitivity on an aggregated level but on a firm-specific level. If the results for a specific firm are robust across methodologies, the corporate manager, the investor, or the stock analyst will rely on such results to a larger extent that if the results are highly sensitive to e.g. a change in observation frequency. We apply firm-specific sensitivity analysis to Scandinavian non-financial firms and find limited consistency in the detected exchange rate exposures when altering methodology in terms of observation frequency and choice of market index. The results put a question mark to the validity of the stock market approach for exchange rate exposure identification at the firm-specific level.

Previous studies show that foreign exchange exposure from international sales can be hedged by foreign debt. We go beyond the foreign sales measure by using a unique database with detailed exposure information on Danish non-financial firms with international operations. Our results indicate that foreign debt is used to hedge foreign assets and subsidiaries (accounting exposure) as opposed to foreign sales (operating exposure). The paper adds to the literature on corporate hedging by highlighting the importance of accounting exposure in the hedging behavior of corporate managers and the perceived need to reduce risks due to currency mismatches between assets and liabilities.

Hong, Kubik and Stein (JFE 2008) find that the price of a stock in the US is decreasing in the ratio ofthe aggregate book value of listed firms in a region to the aggregate personal income in the same region ("RATIO"), an "only-game-in-town" effect. We first replicate the HKS (2008) study using European data and find an opposite effect, a "game-hoarding" effect. We then investigate the underlying factors of RATIO and find that after controlling for differences in origin of law, investor rights, corruption and Euro adoption, neither a game-hoarding effect nor an only-game-in-town effect is strongly supported in the European case. The results are important in understanding the concept of local bias in a crosscountry framework. Hong, Kubik and Stein (JFE 2008) find that the price of a stock in the US is decreasing in the ratio of the aggregate book value of listed firms in a region to the aggregate personal income in the same region ("RATIO"), an "only-game-in-town" effect. We first replicate the HKS (2008) study using European data and find an opposite effect, a "game-hoarding" effect. We then investigate the underlying factors of RATIO and find that after controlling for differences in origin of law, investor rights, corruption and Euro adoption, neither a game-hoarding effect nor an only-game-in-town effect is strongly supported in the European case. The results are important in understanding the concept of local bias in a crosscountry framework.

Politics can interfere with capital markets. We show that political interference is a necessary condition for local bias in the stock market. We extend the framework of Hong, Kubik and Stein (2008) and find that the inverse relation between market-to-book ratios and the ratio of the aggregate book value of firms to the aggregate risk tolerance of investors in a state (RATIO) is only prevalent among firms located in areas where politics has substantial influence on local markets. Our results indicate that the impact of politically induced local bias is primarily demand driven and stronger among firms that are less visible.

Previous literature provides multiple conflicting arguments on why and when multinationality should enhance or impede the value-relevance of firms' real options. We address this issue by examining whether the relationship between stock returns and changes in return volatility varies with multinationality. Our results indicate that multinationality does indeed act as a real option facilitator. Furthermore, we show that, consistent with the notion that there are limits to the operating flexibility associated with multinationality this benefit only accrues fully if the firm is not financially constrained and stabilizes at very high degrees of multinationality.

PurposeThe 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/approachNon‐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.FindingsA 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 implicationsThe 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/valueThe 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.

PurposeTo 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/approachThis 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.FindingsCurrency 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/implicationsThe findings are based on Danish, non‐financial firms listed on the Copenhagen Stock Exchange.Originality/valueThe 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.

We investigate whether and how multinationality affects the opaqueness of the firm. We use multiple alternative measurements of multinationality and opaqueness. Spanning nearly three decades for a large sample of US non-financial firms, we find a statistically and economically significant, positive relationship between multinationality and opaqueness. We find that this positive relationship hinges on whether or not the degree of foreign involvement is compatible with the structure of the firm’s foreign operations network. Our results imply that multinationality’s impact on opaqueness is alleviated when there is harmony between the size of foreign involvement and the extent of the MNC network’s geographic dispersion. Previous literature has implicitly assumed a simple, positive relationship. This is the first study to explicitly address the question in a comprehensive manner. We investigate whether and how multinationality affects the opaqueness of the firm. We use multiple alternative measurements of multinationality and opaqueness. Spanning nearly three decades for a large sample of US non-financial firms, we find a statistically and economically significant, positive relationship between multinationality and opaqueness. We find that this positive relationship hinges on whether or not the degree of foreign involvement is compatible with the structure of the firm's foreign operations network. Our results imply that multinationality's impact on opaqueness is alleviated when there is harmony between the size of foreign involvement and the extent of the MNC network's geographic dispersion. Previous literature has implicitly assumed a simple, positive relationship. This is the first study to explicitly address the question in a comprehensive manner.

This article describes the five-year implementation of enterprise risk management at Hydro One, a Canadian electric utility in a newly deregulated market. Starting with the creation of the position of Chief Risk Officer and the implementation of a pilot risk study involving one of the firm's subsidiaries, the ERM process has made use of a variety of tools and techniques, including the “Delphi Method,” risk trends, risk tolerances, and risk rankings. Among the most tangible benefits of ERM at Hydro One are (1) a better coordinated and more effective process for allocating capital and (2) a favorable reaction to the program by Moody's and Standard & Poor's, which has arguably improved the company's credit rating and lowered its cost of capital. But perhaps equally important is the company's progress in realizing the first principle of its ERM policy—namely, that “risk management is everyone's responsibility, from the Board of Directors to individual employees.” As a result, Hydro One's management feels that the company is much better positioned today to respond to new business developments than it was five years ago.

This empirical study of the exchange rate exposure management of Danish non-financial companies shows that decisions on whether or not to financially hedge an exchange rate exposure is affected by the possibility to react to changes in exchange rates by undertaking various forms of real actions (exercising real options) such as to enter new markets, change suppliers, shift production, among others. The results show that the combined interaction of a firm's size, exports, and foreign subsidiaries, as well as the firm's managerial emphasis on flexibility, are important to real options usage. These findings are important to firms in other countries with open economies.

Previous studies find a monotonic positive relationship between a firm’s internationalization and its foreign exchange hedging. We argue that high levels of internationalization can reduce the need for foreign exchange hedging through diversification (e.g. sales to several markets) and operational hedging (matching of cash flows and operational flexibility). We employ multivariate regression analysis and find an inverse U-shape relationship (“humpback”) for large listed non-financial German firms. Foreign exchange hedging activity peaks when half of sales (or long-term assets) is outside Europe. We do not find support that diversification or production facilities abroad drive our results. Our paper is the first empirical paper to document an inverse U-shape relationship between internationalization and foreign exchange hedging. Previous studies find a monotonic positive relationship between a firm’s internationalization and its foreign exchange hedging. We argue that high levels of internationalization can reduce the need for foreign exchange hedging through diversification (e.g. sales to several markets) and operational hedging (matching of cash flows and operational flexibility). We employ multivariate regression analysis and find an inverse U-shape relationship (“humpback”) for large listed non-financial German firms. Foreign exchange hedging activity peaks when half of sales (or long-term assets) is outside Europe. We do not find support that diversification or production facilities abroad drive our results. Our paper is the first empirical paper to document an inverse U-shape relationship between internationalization and foreign exchange hedging.

This article investigates empirically the potential and actual exchange rate exposure strategies of industrial companies in relation to identifying and quantifying the neutral financial positions in an optimal hedging strategy. A stock market approach as a potential remedy is analyzed but found to be statistically troublesome and fundamentally flawed. Part of the diversity in actual strategies found in this article reflects different competitive environments, while another part indicates that the companies have not yet reached a systematic risk management of ongoing competitive exposures. © 2001 John Wiley & Sons, Inc.

Finance theory suggests that a positive (long) foreign exchange exposure can be offset by debt denominated in foreign currency (“foreign debt”) and empirical studies confirm that foreign debt is used for hedging purposes. We use detailed exposure information on a sample of medium-sized nonfinancial firms and show that in its practical hedging application, foreign debt is used distinctively different from derivatives (e.g. forward contracts). While the use of derivatives is associated with flow measures (foreign sales revenue), the use of foreign debt is solely associated with stock measures (foreign assets and foreign subsidiaries). Thus, the practical hedging application of foreign debt is generally not in accordance with an economic exposure framework but does make sense from a balance sheet approach. Our study distinguishes itself by employing detailed exposure information at the firm level which makes it possible to go deeper than previous studies in detecting the drivers behind foreign debt usage. The empirical results are important in order to understand the factors driving the use of foreign debt in non-financial firms.

This empirical study of manufacturing firms (NAICS 33) in the EU15 countries goes beyond the trade statistics that have indicated only a small to negligible effect from the introduction of the Euro and shows that the introduction of the Euro has made Euro firms (firms based in one of the twelve Euro countries) more inclined than non-Euro firms (firms based in one of the three non-Euro countries: UK, Sweden and Denmark) to undertake various forms of real actions (exercise real business options) such as to establish alliances/partnerships, to enter new markets/market segments, to switch suppliers, and to generally expand in the Euro-area. The results are important in understanding the potential long-term effects of Euro membership. This empirical study of manufacturing firms (NAICS 33) in the EU15 countries goes beyond the trade statistics that have indicated only a small to negligible effect from the introduction of the Euro and shows that the introduction of the Euro has made Euro firms (firms based in one of the twelve Euro countries) more inclined than non-Euro firms (firms based in one of the three non-Euro countries: UK, Sweden and Denmark) to undertake various forms of real actions (exercise real business options) such as to establish alliances / partnerships, to enter new markets / market segments, to switch suppliers, and to generally expand in the Euro-area. The results are important in understanding the potential long-term effects of Euro membership.

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/approachThis empirical study uses survey data and publicly available data for descriptive analysis and ordinary least squares / ordered regression analysis.FindingsWe 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. We find 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/implicationsThe findings are based on medium-sized, manufacturing firms in Denmark.Originality/valueThis study provides empirical evidence on the influence of founder families in medium-sized firms (as opposed to large, listed firms in most other studies) and adds to the sparse literature on the impact of founder family influence on risk management. 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/approachThis empirical study uses survey data and publicly available data for descriptive analysis and ordinary least squares / ordered regression analysis.FindingsWe 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. We find 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/implicationsThe findings are based on medium-sized, manufacturing firms in Denmark.Originality/valueThis study provides empirical evidence on the influence of founder families in medium-sized firms (as opposed to large, listed firms in most other studies) and adds to the sparse literature on the impact of founder family influence on risk management.

This empirical study of non-financial firms is based on a survey of 186 medium-sized, non-financial Danish firms with operating revenues and/or costs in foreign currency. We find that the involvement of non-finance departments in the management of exchange rate risks has a positive impact on currency speculation whether in the form of selective hedging or active speculation. This result adds to the literature and is important given the increasing focus on an integrated perspective on risk management in non-financial firms. We furthermore find and confirm previous studies that currency speculation is widespread also among Danish firms and that such speculation is positively related to the degree of international involvement of the specific firm. This empirical study of non-financial firms is based on a survey of 186 medium-sized, non-financial Danish firms with operating revenues and/or costs in foreign currency. We find that the involvement of non-finance departments in the management of exchange rate risks has a positive impact on currency speculation whether in the form of selective hedging or active speculation. This result adds to the literature and is important given the increasing focus on an integrated perspective on risk management in non-financial firms. We furthermore find and confirm previous studies that currency speculation is widespread also among Danish firms and that such speculation is positively related to the degree of international involvement of the specific firm.

We investigate the behavioral bias in the use of debt denominated in foreign currency (foreign debt) in managing foreign exchange risks. From a strictly financial (rational) point of view foreign debt and derivates are close substitutes. Whether e.g. a European firm sells forward US dollars against Euro (forward contract) or borrows in US dollars (foreign debt) instead of borrowing in Euro makes no difference in foreign exchange exposure terms. Accordingly, Géczy et al. (1997) note that foreign debt can act as a hedge of foreign revenues and displace the need to hedge with derivatives. We analyze foreign exchange risk management in medium-sized, non-financial firms in Denmark and find a behavioral bias in the use of foreign debt. Among the firms that are internationally involved (operating revenues, costs and/or assets in foreign currency), on average a quarter of the financial debt is denominated in foreign currency. The use / non-use of foreign debt is positively related to a number of internationality measures but most significantly to the existence of subsidiaries abroad whereas the degree of usage is particularly related to the magnitude of foreign operating assets. The use of foreign debt distinguishes itself from the use of shortsighted currency derivatives such asforward contracts by not being significantly and positively related to the foreign sales ratio in a multivariate setting. Furthermore, while the degree of matching at the firm level - creating offsetting operating revenues and costs in the same currency - reduces the use of shortsighted financial derivatives, no such impact is detected for the use of foreign debt.Thus, we highlight that in its practical application for the management of foreign exchange risks a close substitution between foreign debt and derivatives is an illusion rather than the reality. The use of foreign debt is behaviorally biased and related to the financing / hedging of foreign assets and subsidiaries (stocks) rather than to the hedging of the economic exposure from foreign sales (flows). As such, the behavioral bias may - at least to some degree - be a result of mental bookkeeping on the balance sheet at the expense of a forward looking view of cash flows. The findings are important to firms in other countries with open economies where foreign debt is also used extensively. We investigate the behavioral bias in the use of debt denominated in foreign currency (foreign debt) in managing foreign exchange risks. From a strictly financial (rational) point of view foreign debt and derivates are close substitutes. Whether e.g. a European firm sells forward US dollars against Euro (forward contract) or borrows in US dollars (foreign debt) instead of borrowing in Euro makes no difference in foreign exchange exposure terms. Accordingly, Géczy et al. (1997) note that foreign debt can act as a hedge of foreign revenues and displace the need to hedge with derivatives. We analyze foreign exchange risk management in medium-sized, non-financial firms in Denmark and find a behavioral bias in the use of foreign debt. Among the firms that are internationally involved (operating revenues, costs and/or assets in foreign currency), on average a quarter of the financial debt is denominated in foreign currency. The use / non-use of foreign debt is positively related to a number of internationality measures but most significantly to the existence of subsidiaries abroad whereas the degree of usage is particularly related to the magnitude of foreign operating assets. The use of foreign debt distinguishes itself from the use of shortsighted currency derivatives such asforward contracts by not being significantly and positively related to the foreign sales ratio in a multivariate setting. Furthermore, while the degree of matching at the firm level - creating offsetting operating revenues and costs in the same currency - reduces the use of shortsighted financial derivatives, no such impact is detected for the use of foreign debt.Thus, we highlight that in its practical application for the management of foreign exchange risks a close substitution between foreign debt and derivatives is an illusion rather than the reality. The use of foreign debt is behaviorally biased and related to the financing / hedging of foreign assets and subsidiaries (stocks) rather than to the hedging of the economic exposure from foreign sales (flows). As such, the behavioral bias may - at least to some degree - be a result of mental bookkeeping on the balance sheet at the expense of a forward looking view of cash flows. The findings are important tofirms in other countries with open economies where foreign debt is also used extensively.

This study examines the sensitivity of detected exchange rate exposures at the firm specific level to changes in methodological choices using a traditional two factor stock market approach for exposure quantification. We primarily focus on two methodological choices: the choice of market index and the choice of observation frequency. We investigate to which extent the detected exchange rate exposures for a given firm can be confirmed when the choice of market index and/or the choice of observation frequency are changed. Applying our sensitivity analysis to Scandinavian non-financial firms, we find aggregate results that are in line with previous studies for small, open economies. However, our main contribution to the existing literature is on the firm specific level where we find a very high defection rate when trying to confirm results from one methodological approach to another. More specifically we find that only one of five detected exchange rate exposures is confirmed when we move from an approach using weekly data to an approach using monthly data. This result is surprising since 1) the aggregate result shows that the number of detected exposures using monthly data is approximately two thirds of the number of detected exposures using weekly data and 2) there is no economic rationale that the detected exposures at the firm-specific level should change when going from the use of weekly data to the use of monthly data. In relation to a change in the choice of market index, we find that one of two detected exposures is confirmed by all variations of market indexes applied. Although the choice of market index involves a high defection rate this is at least partly in accordance with economic rationale since we are dealing with extra-market exchange rate exposures. The results of the study are important because corporate managers, stock analysts and stock pickers are primarily interested in the sensitivity - and thus reliability - of detected exchange rate exposures for a specific firm rather than for an industry or a country as a whole. This study examines the sensitivity of detected exchange rate exposures at the firm specific level to changes in methodological choices using a traditional two factor stock market approach for exposure quantification. We primarily focus on two methodological choices: the choice of market index and the choice of observation frequency. We investigate to which extent the detected exchange rate exposures for a given firm can be confirmed when the choice of market index and/or the choice of observation frequency are changed. Applying our sensitivity analysis to Scandinavian non-financial firms, we find aggregate results that are in line with previous studies for small, open economies. However, our main contribution to the existing literature is on the firm specific level where we find a very high defection rate when trying to confirm results from one methodological approach to another. More specifically we find that only one of five detected exchange rate exposures is confirmed when we move from an approach using weekly data to an approach using monthly data. This result is surprising since 1) the aggregate result shows that the number of detected exposures using monthly data is approximately two thirds of the number of detected exposures using weekly data and 2) there is no economic rationale that the detected exposures at the firm-specific level should change when going from the use of weekly data to the use of monthly data. In relation to a change in the choice of market index, we find that one of two detected exposures is confirmed by all variations of market indexes applied. Although the choice of market index involves a high defection rate this is at least partly in accordance with economic rationale since we are dealing with extra-market exchange rate exposures. The results of the study are important because corporate managers, stock analysts and stock pickers are primarily interested in the sensitivity - and thus reliability - of detected exchange rate exposures for a specific firm rather than for an industry or a country as a whole.

Empirical research has focused on export as a proxy for the exchange rate exposure and the use of foreign exchange derivatives as the instrument to deal with this exposure. This empirical study applies an integrated foreign exchange risk management approach with a particular focus on the role of import in medium-sized, manufacturing firms in Denmark (a small, open economy). We find a strong, negative relation between import and foreign exchange derivatives usage on the aggregate level. Our findings are consistent with the notion that firms use import to match the foreign exchange exposure created by foreign sales activities. Empirical research has focused on export as a proxy for the exchange rate exposure and the use of foreign exchange derivatives as the instrument to deal with this exposure. This empirical study applies an integrated foreign exchange risk management approach with a particular focus on the role of import in medium-sized, manufacturing firms in Denmark (a small, open economy). We find a strong, negative relation between import and foreign exchange derivatives usage on the aggregate level. Our findings are consistent with the notion that firms use import to match the foreign exchange exposure created by foreign sales activities.

Our empirical study of manufacturing firms (NAICS 33) in the 15 countries consisting the EU prior to its 2004 expansion shows that the introduction of the Euro has made firms based in one of the twelve countries that opted to adopt the Euro more inclined than firms based in one of the three non-adopters (UK, Sweden, and Denmark) to exercise various forms of real options such as to establish alliances / partnerships, to enter new markets / market segments, to switch suppliers, and to generally expand in the Euro-area. The study furthermore shows that small, profitable and financially constrained firms are particularly likely to exercise such real options triggered by the introduction of the Euro. The results go beyond the immediate trade effects, which empirical studies have shown to be weak and without trade diversion as to the three non-adopters, and provide important insights about the potential long-term effects of Euro membership

We investigate the market efficiency implications of firm-specific return variation measured by absolute idiosyncratic volatility. We find that the absolute idiosyncratic volatility (the variance of the residual from an asset-pricing model) displays a positive and robust relationship to mispricing (based on both accounting information and alternatively abnormal stock returns). Thus, we find that larger values of absolute idiosyncratic volatility reflect an increasing role of noise traders. Previous literature has produced similar - or opposing - results. We deepen our understanding of the reasons for the lack of consensus in the previous literature by investigating the interaction between market volatility, idiosyncratic volatility, and R-squared. Thus, we show that 1) market volatility by itself is associated with mispricing, 2) absolute idiosyncratic volatility is associated with mispricing even when controlling for market volatility, 3) the strength of the association between absolute idiosyncratic volatility and mispricing depends on the level of market volatility, and 4) absolute and relative measures of idiosyncratic volatility have opposing associations with mispricing.

This empirical study of manufacturing firms (NAICS 33) in the EU15 countries shows that the introduction of the Euro has made Euro firms (firms based in one of the twelve Euro countries) more inclined than non-Euro firms (firms based in one of the three non-Euro countries: UK, Sweden and Denmark) to exercise real options such as to establish alliances / partnerships, to enter new markets / market segments, to switch suppliers, and to generally expand in the Euro-area. The results are robust after controlling for the size of the firms and their sales in the Euro-area. The results go beyond what is explicitly revealed in trade statistics and contribute to our understanding of the potential long-term effects of the Euro.

This empirical study of manufacturing firms (NAICS 33) in the EU15 countries shows that the introduction of the Euro has made Euro firms (firms based in one of the twelve Euro countries) more inclined than non-Euro firms (firms based in one of the three non-Euro countries: UK, Sweden and Denmark) to undertake various forms of real actions (exercise real options) such as to establish alliances/partnerships, to enter new markets/market segments, to switch suppliers, and to generally expand in the Euro-area. The results are important in understanding the potential long-term effects of Euro membership.

Gambling has attracted people since ancient times. This empirical paper surveys and investigates the extent of currency speculation in Danish non-financial firms. Such speculation is widespread and takes the form of selective hedging as well as speculation not related to the underlying business. The results show that if a person (often the founder or the descendants of the founder) is the largest shareholder in the firm, the extent of speculation is reduced. The results enhance our understanding of the reasons behind the corporate practice of currency speculation and are important to non-financial firms in other countries with open economies.

This empirical study of the exchange rate exposure management of Danish non-financial firms listed on the Copenhagen Stock Exchange shows that debt denominated in foreign currency ("foreign debt") is a very important alternative to the use of currency derivatives. The results show that the relative importance of foreign debt is positively related to (1) the extent of foreign subsidiaries, (2) the relative value of assets in place, (3) the size of the firm, and (4) the debt ratio. The pivotal role of time horizon is emphasized. These findings are important to firms in other countries with open economies. This empirical study of the exchange rate exposure management of Danish non-financial firms listed on the Copenhagen Stock Exchange shows that debt denominated in foreign currency ("foreign debt") is a very important alternative to the use of currency derivatives. The results show that the relative importance of foreign debt is positively related to (1) the extent of foreign subsidiaries, (2) the relative value of assets in place, (3) the size of the firm, and (4) the debt ratio. The pivotal role of time horizon is emphasized. These findings are important to firms in other countries with open economies.

Empirical surveys on exchange rate risk management in non-financial companies focus on the use of currency derivatives while omitting the use of corporate debt denominated in foreign currency ("foreign debt") even though the latter in risk management terms is identical to one or a series of forward contracts. This empirical study of the risk management practices of non-financial companies shows (1) that foreign debt is an important alternative to the use of currency derivatives, (2) that the relative importance of foreign debt compared to currency derivatives increases the longer the hedging horizon and the higher the uncertainty, and (3) that companies with a low solvency ratio and stable earnings attribute an especially high importance to the use of foreign debt. The study further suggests that the relative importance attributed to foreign debt differs between companies in various economic sectors.

Financial theory argues that companies should manage cash flows and not accounting earnings when they hedge exchange rate exposures. Still, empirical evidence shows that a number of companies choose to manage accounting earnings. This empirical study of Danish, non-financial companies finds (1) that when hedging the majority of companies expect to add value to their company by avoiding financial distress (reduce down side risk), (2) that when hedging managing cash flows versus managing accounting earnings as a first priority splits the companies in two, (3) a lack of difference (except for profitability) in company characteristics between the group of companies that manage cash flows versus the group of companies that manage accounting earnings as a first priority. The decision in real business on whether to manage cash flows or accounting earnings when hedging exchange rate exposures seems to be more a function of differences in management attitudes than a function of differences in objective company characteristics.

The interaction between real options and financial hedging is analyzed empirically. A majority of Danish non-financial companies either (1) chooses at times not to hedge an exchange rate operating exposure financially due to the possibility of the company to react to changes in exchange rates by undertaking real actions (exercising real options) such as to abandon a market or establish production in a foreign country or (2) thinks it is likely that they will actually react to changes in exchange rates by undertaking such real actions. The role of real options in actual management of exchange rate exposures depends on the economic sector in which the company operates and the size of the company. Companies in Materials (and Consumer Discretionary) are significantly more inclined to undertake various real actions than is the case with companies in Industrials. The same holds for small and large companies as compared to medium-sized companies.

The aim of this paper is to address the impact of E-commerce on the balance between real hedging and financial hedging in the context of exchange rate exposure management in non-financial companies. A cross-case study of industrial companies highlights the inadequacy in taking a partial and static financial approach when managing exchange rate exposures. The paper argues that the emergence of E-commerce - by reducing the cost of obtaining, analyzing and allocating information - affects the dynamics of the markets and the dynamics of the company in such a way that a general tilt towards real hedging can be foreseen.

This cross-case study of eight blue-chip industrial companies extends previous studies of why exchange rate exposure management is done the way it is. While hedging should not be pursued unless it creates value, the operational objectives differ among companies. Avoiding financial distress is considered one of the most important ways of adding value by hedging. However, reducing stakeholders perceived risk and improving the ability to pursue investment plans and make value adding investments do also get some attention. While the overall objective is to add value, the dominating object for management is cash flows and less so accounting earnings. That accounting earnings do receive attention is linked to the possibility of reducing stakeholders perceived risk. In practice there is a focus on short-term cash flow exposures as opposed to the more long-term operating exposures. The study shows that major reasons behind this focus are the dynamic development of the competitive environment and the ability of the specific company to counter unfavorable changes in exchange rates by the exercise of real options (e.g. reallocation of production resources). As such, the study shows the in adequacy in taking a partial and static financial approach when making theoretical recommendations for managing exchange rate exposures in industrial companies.

The relationship between ownership structure and performance has received considerable attention in the literature. This paper focuses on the relationship between ownership structure and risk management. Specifically, the paper addresses the relationship between (1) the identity and influence of the largest shareholder and (2) whether risk management decisions are made in order to satisfy shareholders in particular or stakeholders in general. Covering a sample of Danish, non-financial companies a statistically significant, negative relationship is found between personal ownership and the likelihood that the aim of risk management is to satisfy shareholders in particular. No significant relationship is found for foundation-owned companies. Furthermore, a positive relationship is found between the size of the company and the tendency to satisfy shareholders in particular. The finding in relation to personal ownership is believed to rest on non-financial relations between the companies and the persons in question.

Based on a cross-case study of Danish industrial companies the paper analyzes the benchmarking of the optimal hedging strategy. A stock market approach is pursued but a serious question mark is put on the validity of the obtained information seen from a corporate value-adding point of view. The conducted interviews show that empirical reasons behind actual hedging strategies vary considerably - some in accordance with mainstream finance theory, some resting on asymmetric information. The diversity of attitudes seems to be partly a result of different competitive environments, partly a result of practices and strategies that have been established in each company fairly independently over time. The paper argues that hedge benchmarks are useful in their creation process (by forcing a comprehensive analysis) as well as in their final status (by the establishment of a consistent hedging strategy and objective performance criteria).

Real options like the ability to reallocate production resources can lead to an asymmetric exchange rate exposure. Using a stock market approach in which the exchange rate exposure is derived from the information content in the stock prices this study examines the extra-market exchange rate exposures of a group of blue chip, industrial companies listed on the Copenhagen Stock Exchange. In these companies the existence of real options is an integrated part of the exchange rate exposure management process. The result of the stock market approach is mixed. Statistically significant asymmetric exchange rate exposures are identified successfully but the asymmetries can only to a limited extent be explained by the existence of real options. Financial options and pricing to market are competing explanations. Omitted variable bias further blurs the picture. These problems and the concept of path dependency in real options decision analysis partly disqualifies the stock market approach as a potent vehicle for identifying asymmetric exchange rate exposures caused by real options.

This paper illustrates the profound difference between a risk management strategy of variance minimization and a risk management strategy of lower tail outcome elimination. Risk managers concerned about the variability of cash flows will tend to center their hedge decisions on their best guess on future cash flows (the budget), while risk managers concerned about costly lower tail outcomes will hedge (considerably) less depending on the level of uncertainty. A risk management strategy of lower tail outcome elimination is in line with theoretical recommendations in a corporate value-adding perspective. A cross-case study of blue-chip industrial companies partly supports the empirical use of a risk management strategy of lower tail outcome elimination but does not exclude other factors from (co-)driving the observations.