Why Chinese Non-Financial Firms Hedge? An Empirical Study on the Determinants of Corporate Hedging

Li, Xinyuan (2022) Why Chinese Non-Financial Firms Hedge? An Empirical Study on the Determinants of Corporate Hedging. [Dissertation (University of Nottingham only)]

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With the rapid development of China's financial markets and the internationalisation of the RMB, Chinese firms are increasingly exposed to default risk and foreign exchange risk, and hence the use of derivatives for hedging as a risk management approach is increasingly used by Chinese firms. Using a unique dataset manually collected from company annual reports, this study examines the question of what the determinants of hedging for Chinese companies are, using a sample of 307 non-financial Chinese companies listed on the Hong Kong Stock Exchange from 2017 to 2020.

To investigate the above issues, this paper first presents a descriptive statistical analysis of Chinese firms' hedging activities, which includes analyses of the full sample, Hong Kong firms and mainland Chinese firms. The study then uses the univariate logit regression model and the multivariate logit regression model to analyse the relationship between the likelihood of Chinese firms engaging in hedging activities and firm characteristics.

The results of this empirical study are as follows. First, Chinese firms with large firm sizes are more willing to use hedging for risk management. This supports the economies of scale hypothesis. Secondly, the more transactions a firm has with foreign countries the more incentive it has to engage in amortisation. This result supports the foreign exchange exposure hypothesis. In addition, there is no strong evidence to support the possibility of the financial distress hypothesis, the cost of underinvestment hypothesis and the substitutes of hedging hypothesis proposed in this study. Therefore, this paper argues that the factors that influence Chinese firms' decisions to engage in hedging activities are foreign exchange risk exposure and economies of scale.

Item Type: Dissertation (University of Nottingham only)
Depositing User: LI, Xinyuan
Date Deposited: 25 Apr 2023 13:18
Last Modified: 25 Apr 2023 13:18
URI: https://eprints.nottingham.ac.uk/id/eprint/67633

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