Monday, November 12, 2012

MASSA Massimo, ZHANG Lei
Does Corporate Hedging Attract Foreign Investors? Evidence from International Firms
INSEAD Working Paper 2012/113/FIN

We study how corporate financial hedging affects the demand of foreign institutional investors. Given that investors benefit from hedging when the manager has information not directly observable to shareholders (DeMarzo and Duffie, 1991), corporate hedging is especially valuable for international investors that invest abroad facing the highest informational uncertainty. We focus on a comprehensive sample of 7,878 international non-financial companies from 2001 to 2009, for which we have collected measures of both foreign exchange hedging and interest rate hedging. We document a strong, positive relationship between foreign institutional demand and corporate hedging for both US and non-US institutions. The effect of hedging is concentrated in the demand of non-bank-affiliated foreign investors, whereas bank-affiliated investors are less sensitive to it. The impact of hedging on international demand is higher for less transparent countries, and a low quality of governance amplifies the effect of lower transparency. We address the issue of potential endogeneity of hedging with firm-fixed effects as well as with an instrumental variable specification that exploits changes in corporate hedging induced by changes in the asset quality of the relationship banks. We also use the IPO as an experiment and show that the before-IPO hedging policy is positively related to international investor demand after the IPO.