Financial theory argues that companies should manage cash flows and not accounting earnings when they hedge exchange rate exposures. Still, empirical evidence shows that a number of companies choose to manage accounting earnings. This empirical study of Danish, non-financial companies finds (1) that when hedging the majority of companies expect to add value to their company by avoiding financial distress (reduce down side risk), (2) that when hedging managing cash flows versus managing accounting earnings as a first priority splits the companies in two, (3) a lack of difference (except for profitability) in company characteristics between the group of companies that manage cash flows versus the group of companies that manage accounting earnings as a first priority. The decision in real business on whether to manage cash flows or accounting earnings when hedging exchange rate exposures seems to be more a function of differences in management attitudes than a function of differences in objective company characteristics.
Translated title of the contribution
Cash Flows versus Accounting Earnings in Managing Exchange Rate Exposures: An Empirical Study of Non-Financial Companies
Original language
English
Publication year
2003
Number of pages
25
Publication status
Published - 2003
Event
FMA European Conference, Dublin, Ireland - Duration: 4 Jun 2003 → 7 Jun 2003