Aabo, Tom7; Hansen, Marianna Andryeyeva5; Muradoglu, Yaz Gulnur6
1 Department of Economics and Business - Business Studies, Department of Economics and Business Economics, Aarhus BSS, Aarhus University2 Department of Business Studies, Aarhus School of Business, Aarhus BSS, Aarhus University3 Finance Research Group, Aarhus School of Business, Aarhus BSS, Aarhus University4 Department of Economics and Business Economics, Aarhus BSS, Aarhus University5 Novozymes A/S,6 Cass Business School,7 Department of Economics and Business Economics, Aarhus BSS, Aarhus University
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.