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Exchange-Rate Exposure: Financial vs. Operating Strategies,
with George Allayannis and Jane Ihrig, American Economic Review Papers
and Proceedings, 91 (June 2001), 391-398.
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This paper
investigates both financial and operational exchange-rate risk management
strategies of multinational firms and how such strategies contribute to
mitigating risk and improving shareholder value. Using a sample of U.S.
multinational nonfinancial firms from 1996-1998, we find that operational
hedging is not an effective substitute for financial risk management.
However, we find that the more geographically disperse a firm is, the more
likely it is to use financial hedges. The end result on firm value is that
operational hedging strategies benefit shareholders only when used in
combination with financial hedging strategies.
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