Tom Aabo

Corporate Foreign Exchange Speculation and Integrated Risk Management

Purpose - The purpose of this paper is to investigate how non-finance departmental involvement in the management of exchange rate risks impacts the extent of foreign exchange speculation in non-financial firms. Design/methodology/approach - Non-financial firms in a small open economy (Denmark) are surveyed to investigate the extent of foreign exchange speculation and how it is related to the degree of nonfinance departmental involvement in the management of exchange rate risks. The authors employ binary and ordered probit regression analysis. Findings - A positive link is found between the extent to which departments other than the finance department are involved in the management of exchange rate risks; and second, the extent to which the firm is likely to speculate – whether in the form of selective hedging or active speculation – on the foreign exchange market. Practical implications - The findings indicate that the trend towards a more integrated risk management approach in which the finance department is not the only department responsible for risk management may have the (unforeseen) consequence that foreign exchange speculation increases. Originality/value - The papers findings are important because the link between the extent of foreign exchange speculation and a more integrated risk management approach has not been addressed previously.

Idiosyncratic Volatility: An Indicator of Noise Trading?

We investigate the market efficiency implications of firm-specific return variation measured by absolute idiosyncratic volatility. We find that the absolute idiosyncratic volatility (the variance of the residual from an asset-pricing model) displays a positive and robust relationship to mispricing, which reflects an increasing role of noise traders. Previous literature has produced similar – or opposing – results. We deepen our understanding of the previous conflicting results by showing that (1) market volatility by itself is associated with mispricing, (2) absolute idiosyncratic volatility is associated with mispricing even when controlling for market volatility, (3) the strength of the association between absolute idiosyncratic volatility and mispricing depends on the level of market volatility, and (4) absolute and relative measures of idiosyncratic volatility have opposing associations with mispricing. Our findings contribute to the existing literature by reconciling the mixed results for the relationship between idiosyncratic volatility and mispricing displayed in the previous literature.

The impact of individual-owners on currency speculation: the case of Danish non-financial firms

Purpose - To investigate the extent to which finance managers in non-financial firms speculate in the currency markets and particularly to investigate the effect of individual-owners on such speculation. Design/methodology/approach - This paper uses survey data in order to analyse the extent of currency speculation in non-financial firms. It uses survey data and publicly available data in an ordered probit regression analysis in order to analyse the decisive factors behind the extent of currency speculation in non-financial firms. Findings - Currency speculation is widespread among non-financial firms and takes the form of selective hedging as well as speculation not related to the underlying business. The extent of speculation is positively related to the size of the firm, to the international involvement of the firm, and to the conservatism of its capital structure. If an individual (often the founder or a descendant of the founder) is the largest shareholder in the firm, the extent of such speculation is significantly reduced. Research limitations/implications - The findings are based on Danish, non-financial firms listed on the Copenhagen Stock Exchange. Originality/value - The contribution of this paper is to provide evidence on the negative relationship between individual-owners (ownership structure) and the extent of currency speculation in non-financial firms and more generally to investigate the factors behind such speculation.

The German Humpback: Internationalization and Foreign Exchange Hedging

Previous studies find a monotonic positive relationship between a firm’s internationalization and its foreign exchange hedging. We argue that high levels of internationalization can reduce the need for foreign exchange hedging through diversification (e.g. sales to several markets) and operational hedging (matching of cash flows and operational flexibility). We employ multivariate regression analysis and find an inverse U-shape relationship (“humpback”) for large listed non-financial German firms. Foreign exchange hedging activity peaks when half of sales (or long-term assets) is outside Europe. We do not find support that diversification or production facilities abroad drive our results. Our paper is the first empirical paper to document an inverse U-shape relationship between internationalization and foreign exchange hedging.

Game Hoarding in Europe: Stock-Price Consequences of Local Bias?

Local bias within a country and between countries is well established in the empirical literature. However, the underlying reasons are less well established. In a simple supply and demand framework, Hong, Kubik, and Stein (hereafter HKS) [2008. The only game in town: Stock-price consequences of local bias. Journal of Financial Economics 90, no. 1: 20--37.] find an ‘only-game-in-town’ effect in the USA -- the stock price in a region decreases in the ratio of aggregate book value of listed firms to the aggregate personal income (‘RATIO’). We first replicate the HKS (2008) study using European data and find an opposite effect, a ‘game-hoarding’ effect. We then investigate the underlying factors of RATIO and find that after controlling for differences in origin of law, investor rights, corruption and Euro adoption, neither a game-hoarding effect nor an only-game-in-town effect is strongly supported in the European case. The results are important in understanding the concept of local bias in a cross-country framework.

Founder family influence and foreign exchange risk management

Purpose - The purpose of this study is to explore the influence of founder families in medium-sized manufacturing firms and to investigate the impact of such influence on risk management – more specifically foreign exchange hedging and speculation. Design/methodology/approach - This empirical study uses survey data and publicly available data for descriptive analysis and ordinary least squares/ordered regression analysis. Findings - The authors find that two thirds of medium-sized manufacturing firms are founder family firms in which the founder of the firm or members of his/her family are active in the management team, are members of the board of directors, and/or are shareholders of the firm. The study finds no difference between such founder family firms and other firms in terms of the use/non-use decision related to foreign exchange derivatives but a marked difference in terms of the extent decision. Thus, founder family firms tend not only to hedge but also to speculate more extensively than other firms. Research limitations/implications - The findings are based on medium-sized manufacturing firms in Denmark. Originality/value - This study provides empirical evidence on the influence of founder families in medium-sized firms and adds to the sparse literature on the impact of founder family influence on risk management.

In or out: the effect of euro membership on the exercise of real business options

This empirical study of manufacturing firms (NAICS 33) in the EU15 countries goes beyond the trade statistics that have indicated only a small to negligible effect from the introduction of the Euro and shows that the introduction of the Euro has made Euro firms (firms based in one of the 12 Euro countries) more inclined than non-Euro firms (firms based in one of the three non-Euro countries: UK, Sweden, and Denmark) to undertake various forms of real actions (exercise real business options) such as to establish alliances/partnerships, to enter new markets/market segments, to switch suppliers, and to generally expand in the Euro-area. The results are important in understanding the potential long-term effects of Euro membership.

In or Out: The Effect of Euro Membership on the Exercise of Real Options

This empirical study of manufacturing firms (NAICS 33) in the EU15 countries shows that the introduction of the Euro has made Euro firms (firms based in one of the twelve Euro countries) more inclined than non-Euro firms (firms based in one of the three non-Euro countries: UK, Sweden and Denmark) to undertake various forms of real actions (exercise real options) such as to establish alliances/partnerships, to enter new markets/market segments, to switch suppliers, and to generally expand in the Euro-area. The results are important in understanding the potential long-term effects of Euro membership.

The Impact of Family Ownership on Currency Speculation: The Case of Danish Non-Financial Firms

Gambling has attracted people since ancient times. This empirical paper surveys and investigates the extent of currency speculation in Danish non-financial firms. Such speculation is widespread and takes the form of selective hedging as well as speculation not related to the underlying business. The results show that if a person (often the founder or the descendants of the founder) is the largest shareholder in the firm, the extent of speculation is reduced. The results enhance our understanding of the reasons behind the corporate practice of currency speculation and are important to non-financial firms in other countries with open economies.