Purpose – The purpose of this paper is to examine the impact of US dollar exchange rate risk on the value of Canadian non‐financial firms. Design/methodology/approach – The sample, from the Compustat database, includes all non‐financial Canadian firms with sales over $100 million. The study segregates firms into hedging and non‐hedging groups and applies statistical techniques to test if hedging enhances value. Findings – The results demonstrate that Canadian firms that have higher levels of US$ sales tend to use derivatives more frequently through higher levels of US$ exposure. Firms that have both US sales and assets appear less likely to use hedging. Firms with an American subsidiary and use financial instruments to hedge have higher values. When operational hedging is used with financial hedging, it is a value enhancing activity increasing their market‐to‐book by 14 per cent and market value‐to‐sales by 40 per cent. Incremental impact of these two hedging strategies is to enhance value by 7 per cent. Research limitations/implications – The sample from Compustat captures large capitalization Canadian firms but ignores about 75 per cent of Canadian firms. There is a bias towards larger firms. Some hedging items are not disclosed on financial statements. A survey would enhance and complement these results. Practical implications – The paper finds that it is important for Canadian firms that have exports denominated in US dollars to hedge their exposure. The full value of hedging is reaped by using both operational and financial hedges. Originality/value – This study is the first that examines US dollar risk management by Canadian firms.
Management Research News – Emerald Publishing
Published: Jun 20, 2008
Keywords: Hedging; Financial risk; Currency options; Canada; United States of America; Exchange rates