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International cash management and hedging: a comparison of UK and French companies

Capstaff, J. and Marshall, A.P. (2005) International cash management and hedging: a comparison of UK and French companies. Managerial Finance, 31 (10). pp. 18-34. ISSN 0307-4358

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Several papers have investigated the use of foreign exchange (FX) derivatives but evidence on the use of international cash management methods to hedge FX is scarce. This paper contributes to the existing evidence by considering the use of international cash management systems to hedge foreign exchange (FX) risks using a sample of French and UK companies. We find that matching, netting and pricing policies are the most commonly used techniques in both the UK and French samples although there is evidence of greater use of all cash management techniques in the UK. We also consider whether the theoretical explana tions of hedging determine the use of cash management tech niques for FX hedging, and if there are differences between the UK and French samples. We find support for the theoreti cal prediction that FX hedgers have higher levels of finan cial distress, and that these firms tend to be larger, more international and less liquid. We find little support for the under investment theory. The extent of internationalisa tion appears to play no role in the decision of French firms to use cash management techniques to manage FX risk, and the use of all cash management techniques were lower than in UK firms. These latter findings may be explained by the reduction in FX risk facing French firms following the introduction of the euro.