By Jonathan A. Batten, Peter MacKay, P. Mackay, N. Wagner
The most recent examine on measuring, coping with and pricing monetary threat. 3 vast views are thought of: monetary hazard in non-financial companies; in monetary intermediaries similar to banks; and eventually in the context of a portfolio of securities of other credits caliber and marketability.
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Although our chapter is the ﬁrst to show that adopting hedging strategies similar to the rest of the industry lowers a ﬁrm’s exposure, the prediction that ﬁrms ﬁnd safety in conforming to the majority’s decision is not new. De Meza (1986) demonstrates that as the number of ﬁrms adopting a given production technology increases, output prices correlate more closely with production costs, providing ﬁrms with a better hedge against changes in the cost of production. Maksimovic and Zechner (1991) use the same theoretical argument to show that agency problems associated with debt need to be studied in a multi-ﬁrm framework because the risk of a project’s cash ﬂows is endogenously determined by the investment decisions of all ﬁrms in an industry.
Dev. 67% 1 54974 Max. 05 Min. 5837 510 5327 772 827 555 215 263 268 265 210 214 772 320 772 768 772 772 754 556 827 556 Obs. Notes: This table presents summary statistics of all variables used in the analysis. Median variables are unweighted medians based on all ﬁrm observations within a four digit SIC industry. Variable deﬁnitions can be found in the Appendix. 1 Descriptive statistics Strategic Risk Management 11 average price-cost margin, using Compustat data, using the following formula, N PCM = i=1 si si − ci , × s si where si is the net sales of ﬁrm i, ci is the cost of goods sold of ﬁrm i, and s is the total sales of all single-segment ﬁrms in the same industry; N is the total number of single-segment ﬁrms per industry.
To measure the prevalence of derivatives usage we use the market-value-weighted fraction of derivatives usage, which is deﬁned as the sum of market values of FX derivatives users in a four digit SIC industry, divided by the sum of market values of all ﬁrms in that industry. We use a market value-weighted measure to account for the fact that larger ﬁrms represent a bigger share of industry output, and thus their hedging choices are more important to competitors than the hedging choices of smaller ﬁrms.