Influence of financial distress on foreign exchange exposure

Aigbe Akhigbe, Anna D. Martin and Laurence J. Mauer

American Journal of Business, 2014, vol. 29, issue 3/4, 223-236

Abstract: Purpose - – The purpose of this paper is to investigate whether a non-monotonic relationship may exist between financial distress and foreign exchange (FX) exposure. The authors hypothesize that firms with higher FX exposures are those with the lowest levels of financial distress because the costs of hedging exceed the benefits and those with highest levels of financial distress due to the conflict of interest between shareholders and bondholders. Design/methodology/approach - – The methodology allows for the possibility of a non-monotonic relation between financial distress and FX exposure for firms known to have ex-ante exposures. The approach is to include a Black-Scholes-Merton financial distress measure and standard accounting-based financial distress measures. Findings - – The results support the hypothesis of a non-monotonic relationship between financial distress and exposure; companies with the lowest and highest levels of financial distress are willing to bear greater FX exposures. Originality/value - – The authors examine whether a non-monotonic relationship may exist between distress and FX exposure. Intuition for this non-monotonic relationship is provided by Stulz (1996) as he describes the risk management practices of firms with low, medium, and high default probabilities.

Keywords: Default; Risk management; Currency hedging; Financial distress; Foreign exchange exposure; Bankruptcy (search for similar items in EconPapers)
Date: 2014
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:ajbpps:v:29:y:2014:i:3/4:p:223-236

DOI: 10.1108/AJB-07-2013-0054

Access Statistics for this article

American Journal of Business is currently edited by Dr David Burnie

More articles in American Journal of Business from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().