Do firms hedge in translation risk?

This paper examines if and how multinational companies hedge exchange-rate translation risk. Our research covers 25 countries over a period of 4 years (2003-2006). Although a slight majority of firms leaves translation risk unhedged, a significant percentage of companies (47%) do actively manage translation risk. Hedgers are dominant in northern Europe while non hedgers prevail in South Europe, South America and Asia. A key determinant of the hedging decision is the firm's credit rating. If companies have a credit rating, they wish to maintain it and therefore they tend to manage translation risk to avoid translation losses raising leverage ratios. IFRS adopters hedge more than multinationals using exclusively national principles. With regard to hedging instruments, the relative majority of companies prefer internal hedging by borrowing in foreign subsidiaries' currencies. Derivatives are more common among US GAAP adopters while loans and mixed solutions are preferred among multinationals adopting IFRS or local accounting principles.