George Allayannis

Exchange Rate Exposure, Hedging, and the Use of Foreign Currency Derivatives

We examine whether firms use foreign currency derivatives for hedging or for speculative purposes. Using the sample of all SP the use of derivatives significantly reduces the exchange-rate risk firms face. We also find that the decision to use derivatives depends on exposure factors (i.e. foreign sales and foreign trade) and on variables largely associated with theories of optimal hedging (i.e., size and R&D expenditures), and that the level of derivatives used depends only on a firms exposure through foreign sales and trade.

The impact of negative cash flow and influential observations on investment-cash flow sensitivity estimates

Abstract Kaplan and Zingales [Quart. J. Econ. 112 (1997) 169] and Clearly [J. Finance 54 (2) (1999) 673] diverge from the large literature on investment–cash flow sensitivity by showing that investment is most sensitive to cash flow for the least financially constrained firms. We examine if this result can be explained by the fact that when firms are in sufficiently bad shape (incurring cash losses), investment cannot respond to cash flow. We find that while Clearys results can be explained by such negative cash flow observations, the Kaplan–Zingales results are driven more by a few influential observations in a small sample. We also record a decline in investment–cash flow sensitivity over the 1977–1996 period, particularly for the most constrained firms.

Earnings Smoothing, Analyst Following, and Firm Value

This paper examines whether earnings smoothing based on accounting discretion is positively associated with value when less information is otherwise available. We estimate a smoothing index which measures the decrease in earnings per share volatility related to the use of discretionary accruals, and proxy for a firm’s information environment using the number of analysts following the firm. In unconditional tests, we find a modest though statistically significant premium for firms that smooth earnings. However, consistent with our hypothesis, we find that this premium is concentrated among firms with low or no analyst following. On average, we find no relation between firm value and earnings smoothing for firms with a high analyst following. These findings are consistent with findings that earnings smoothing increases the informativeness of earnings.

The Effect of Markups on the Exchange Rate Exposure of StockReturns

This paper examines how to properly specify and test for factors that affect the exchange-rate exposure of stock returns. We develop a theoretical model, which explicitly identifies three channels of exposure. An industrys exposure increases (1) by greater competitiveness in the market where its final output is sold, (2) the interaction of greater competitiveness in its export market and a larger share of exports in production and, (3) the interaction of less competitiveness in its imported input market and the smaller the share of imports in production. Using a sample of 82 U.S. manufacturing industries at the 4-digit SIC level, classified in 18 2-digit industry groups, between 1979 and 1995, we estimate exchange-rate exposure as suggested by our model. We find that 4 out of 18 industry groups are significantly exposed to exchange-rate movements through at least one channel of exposure. On average, a 1 percent appreciation of the dollar decreases the return of the average industry by 0.13 percent. Consistent with our models predictions, as an industrys markups fall (rise), its exchange-rate exposure increases (decreases).

Financial Policies and Hedging

While firms commonly benchmark corporate financial policies against industry peers, empirically, some firms consistently deviate to pursue “rogue” policies with either a conservative or an aggressive bias. Using a panel of large U.S. firms between 1975 and 2008, we study the incidence, joint frequency distribution, and valuation effect of conservative and aggressive financial policies across four policy dimensions: leverage, payout, liquidity, and risk management. Consistent with a hedging effect, we find that conservative (aggressive) financial policies are generally associated with higher (lower) valuations. In addition, consistent with hedging theories, we find that firms with high growth opportunities which also face financial constraints benefit more from conservative financial policies. We also observe a time-variation in the valuation effects. For example, we find that conservative liquidity policies are associated with lower valuation benefits during periods of high economic growth while most aggressive policies are associated with even lower valuations as the average level of the policy increases. Finally, our tests of joint rogue policies provide evidence consistent with agency explanations. For example, firms which pursue both conservative leverage and conservative liquidity policies are valued at a discount, even though those that pursue a conservative leverage or a conservative liquidity policy on its own are valued at a premium.

Legal Effectiveness and External Capital: The Role of Foreign Debt

Previous research has documented weak, and sometimes conflicting, effects of legal quality on measures of firm debt. Using WorldScope data for 1,689 firms, as well as more detailed proprietary data for 315 firms across nine East Asian countries, the authors find that access to foreign financing appears to loosen borrowing constraints associated with poor legal systems. This helps resolve inconsistencies in prior findings and explains how legal protection is important for borrowing by firms. In particular, they find that legal effectiveness is important for determining the amount, maturity, and currency denomination of debt. The authors discuss several mechanisms by which firms can avoid the costs of poor legal systems with foreign borrowing. The paper contributes to the policy debate surrounding the importance of creditor rights for domestic lending.

The impact of the asian financial crisis on U.S. multinationals

This paper examines the impact of the Asian crisis on U.S. firms. We find that while neither the average U.S. firm nor the average U.S. multinational was affected by the crisis, U.S. multinationals with presence in East Asia were negatively and significantly affected. On average, these firms experienced a sizable (−1.43%) abnormal return per month during the crisis period. We also find that currency derivatives use and potential operational hedging strategies did not significantly protect firms from the East Asian crisis. This is perhaps due to the magnitude of the shock and the resultant lack of liquidity in the derivatives markets during and after the crisis.