1 Department of Economics and Business Economics, Aarhus BSS, Aarhus University2 Department of Economics and Business Economics - The Tuborg Research Centre for Globalisation and Firms, Department of Economics and Business Economics, Aarhus BSS, Aarhus University3 Grundfos Management A/S4 Department of Economics and Business Economics, Aarhus BSS, Aarhus University
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.
Journal of Multinational Financial Management, 2014, Vol 27, p. 114-129