The effectiveness of foreign debt in hedging exchange rate exposure: Multinational enterprises vs. exporting firms

Abstract

This study examines the effect of foreign debt use on the reduction in foreign exchange rate risk between multinational enterprises (MNEs) and exporting firms. We use manufacturing firms in Korea and find that the hedging effectiveness of foreign debt of MNEs is more salient than that of exporting firms. Results are robust after controlling for self-selection effect and alternative measurements for individual currency exposure. Our findings suggest that the effectiveness of foreign debt in reducing FX exposure is influenced by the volatility of foreign cash inflows that depends on different operating characteristics between two groups of firms.