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Financial Regulation, Exchange Rate Exposure, and Hedging Activities: Evidence from Korean Firms

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  • Jong-Hee Kim
  • Joocheol Kim

Abstract

In this article, we attempt to estimate whether firm-specific exchange rate exposures affected by hedging activities can be improved through financial regulation or supervision. To analyze this, we compose three-step estimations by using a sample of KOSPI 200 firms during 1,803 trading days between 2005 and 2012. We first estimate the relationship between exchange rate exposure and hedging activities and see whether financial regulation had any effect on hedging activities. Furthermore, using TSLS analysis, we estimate the effect of hedging activities on exchange rate exposure, which is caused by tightened financial regulation in the form of corporate governance. We report the following findings. First, firms are less likely to be exposed to exchange risk with more hedging activities. Second, corporate governance has a strongly positive effect on the hedging activities. Firms use more hedging tools when they have a strong structure of shareholder’s protection, clear outside ownership, and a better monitoring system; but the relationship becomes weaker in times of crisis.

Suggested Citation

  • Jong-Hee Kim & Joocheol Kim, 2015. "Financial Regulation, Exchange Rate Exposure, and Hedging Activities: Evidence from Korean Firms," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 51(S1), pages 152-173, January.
    • Handle: RePEc:mes:emfitr:v:51:y:2015:i:s1:p:s152-s173
    DOI: 10.1080/1540496X.2014.998893
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    Cited by:

    1. Atilgan, Yigit & Demirtas, K. Ozgur & Simsek, Koray D., 2016. "Derivative markets in emerging economies: A survey," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 88-102.
    2. Jaratin Lily & Imbarine Bujang & Abdul Aziz Karia & Mori Kogid, 2018. "Exchange rate exposure revisited in Malaysia: a tale of two measures," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 8(4), pages 409-435, December.

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