Determinants of Corporate Hedging: Evidence from Emerging Market

Abstract

The main purpose of this study is to understand the determinants of corporate hedging in emerging markets. The dependent variable, hedging, is estimated by a categorical variable. This process necessitates the usage of logistic regression. The analysis is conducted using data from non-financial companies listed in Borsa Istanbul (BIST) between 2010 and 2014. Evidence reveals that the cost of underinvestment has the highest impact on the likelihood of hedging. Firms with higher cost of underinvestment are more likely to use financial derivatives. The second most important determinant of hedging is growth opportunities. Interestingly, firms with greater growth opportunities are less likely to use derivatives in emerging markets. Results indicate that firm size, foreign sales, profitability, and dividend yield are the other predictors that increase the likelihood of hedging. On the other hand, growth opportunities, free-float rate, interest coverage ratio, and leverage have a negative relationship with the possibility of using financial derivatives.