Motives for Corporate Hedging : Evidence from the UK

In this paper we use survey data and data from annual reports to identify the determinants of hedging activity of United Kingdom (UK) firms in the context of an overall program of risk management. Comparing the two sets of data makes it possible to identify misclassified firms, that is, firms whose hedging claims are not consistent across the two data sets. Our results on the consistent data show that the likelihood of hedging is related to growth options, foreign currency exposure, liquidity and economies of scale in hedging costs. Contrary to many previous US studies, we also find strong evidence linking the decision to hedge and the expected costs of financial distress. Results for the misclassified firms suggest that they are actually hedgers that hedge less extensively than the correctly classified (CC) hedgers