Hedging and hedge accounting: Choices with respect to foreign currency exchange risk

This dissertation samples over 1,000 firms to identify determinants of foreign currency hedging and hedge accounting behavior. The identification of hedge determinants offers important building blocks to finance and accounting academics who are working to develop a positive theory of corporate hedging. Findings with respect to hedge accounting choices are of interest to financial statement users and accounting policy makers as the results show that systematic variation in hedge accounting choices exist.;The study begins with a descriptive analysis of how the decision to hedge foreign currency exchange risk varies with the application of accounting standards, functional currency choices, multinational exposures, and profitability of foreign operations. The chief finding of the initial analysis is that accounting standards create an environment where balance sheet hedging of foreign currency risk is rarely undertaken.;The dissertation continues by exploring, in more depth, firms' decisions to hedge foreign currency exchange risk. The goal of the second analysis is to provide a greater understanding of the role that agency-related incentives play in a firm's decision to hedge foreign currency risk. The results show that the hedging of foreign currency risk can potentially affect the agency costs associated with free cash flows and managerial contracting. Other important determinants of hedging choice are the accounting regime governing the remeasurement of foreign currency gains and losses, the size of the firm, tax incentives, and the intensity of foreign operations.;The research concludes by examining firms' decisions to apply hedge accounting when accounting for foreign currency exchange hedge components. An agency-theoretic framework is used to develop hypotheses suggesting that the application of hedge accounting is a strategic accounting choice. The analysis supports growth, firm size, operation in a regulated industry, and hedging expertise as the most important determinants of hedge accounting choices.