Determinants of Corporate Hedging Practices in Malaysia

Abstract

This paper examines the impact of the firm specific factors on the use of foreign exchange and interest rate derivative instruments for Malaysian firms. We find that firms’ foreign sales, growth options, managerial ownership and size have positive influence on the use of foreign exchange and interest rate derivatives in Malaysia. In particular, our results show that Malaysian firms with higher level of foreign sales and growth opportunities are active users of the foreign currency derivatives, while, firms with higher ratio of quick assets do not use such derivatives, as these firms use excess liquidity to absorb unpredicted changes in the foreign currency and interest rate risks. Our findings suggest that only a small number of Malaysian listed firms have appropriate understanding of the derivatives instruments to mitigate market risks in the international business environment. Most Malaysian managers seem to be risk averse and might not be aware of the upside of taking position in the derivatives markets.

Keywords: hedging, risk management, derivatives, internationalization, Malaysia