Currency Hedging by Multinationals Under Financial Crisis

Hedging is no longer an option for multinational corporations, especially during global financial crisis. This was clearly manifested in companies’ comprehensive income statement as in WalMart’s case that “During fiscal 2009, foreign currency exchange rate had a $2.3 billion unfavorable impact on the international segment’s net sales” and the company just lost $680 million in the second quarter of 2013 due to no currency hedging. Motivated by the information, this paper examines the effects of currency hedging by multinational corporations in the sectors of oil & gas, information technology, and consumer goods and services over the past five years from 2008 to 2012. By manually collecting the currency hedging data and other variables from each of the thirty multinationals’ comprehensive income statements and consolidated balance sheets, we tested the hedging impact on firm value for the full, “during,” and “after” crisis periods. Employing Tobin’s Q model as in Allayannis and Weston (2001), the results indicate that liquidity is positive and significant to the firm value for all periods, while growth options negatively impact the valuation for the full and ‘after’ samples. Furthermore, hedging does not appear to be significant in any sample period as found in Jin and Jorion (2006) oil and gas companies. However, the sub-sample of ‘during’ crisis period demonstrates an interesting finding that the negative driving force of growth options on firm value becomes insignificant, which is intuitively making sense as growth options would put financial constraints on the firm particularly during financial crisis. This is a new finding that contributes to the current literature. JEL classification: G15, G32