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Firm complexity and FX derivatives use.(foreign exchange )(Author abstract)

We simultaneously test complexity (the degree of information asymmetry) and six other theories of FX derivatives use. Structural equations modeling, a method common in other disciplines but dormant in finance since Titman and Wessels (1988), provides a natural arena for testing multiple theories against each other. We find clear empirical evidence that complexity, managerial options ownership, financial distress, and primitive risk relate to two measures of hedging behavior. Our estimates do not support roles for underinvestment or scale economies in explaining hedging. Our data set comprises all US firms with sales exceeding $1 billion.

Introduction

Complexity is the degree of ...

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