Corporate risk management: An empirical evidence on foreign currency derivatives’ use by Malaysian nonfinancial firms

During the last decade, the issue of using financial hedging instruments get attention of top management specially of nonfinancial firms due to the increase in cross-border trade and variations in foreign exchange rates. As Malaysia is an open economy with high exchange rate fluctuations, this study test different corporate hedging theories in the Malaysian context and investigated factors that can better explain the use of foreign currency derivatives. We found weak evidence for underinvestment theories as well as ‘Risk Management Committee’, but strong evidence for financial distress theories. We also find support for size and market-openness hypothesis but weak support for the liquidity hypothesis. However, in the robustness test, all proxies of underinvestment theory and Risk Management Committee is found to be significant when the model is run after excluding SIZE variable. Finally, our results run counter to the conjecture that high exchange rate exposure firms are more inclined towards derivative usage.