Microsoft Word 2007 ichrie conference Proceedings Final-Final 06-06-07. doc

 
2007 Annual International CHRIE Conference & Exposition 
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based on the assumption that firms with higher coverage ratios face lower exposure because of their ability to 
service debt payments and absorb unexpected shocks. Because economies of scale are an increasing function of 
firm size, the log of the sales is used to proxy for firm size. Larger firms may be better able to manage risk 
exposures than smaller firms so larger firms are expected face higher exposures. The quick ratio (cash + marketable 
securities + accounts receivables) is included as a proxy variable for hedging substitutes because firms with higher 
amounts of internal funds (higher liquidity) can withstand unexpected shocks and reduce potential financial distress 
costs, and therefore be less likely to hedge the exposure. Finally to control for foreign exchange exposure, I include 
the ratio of foreign sales to total sales. Previous research has documented the importance of this variable in the 
decision to hedge and level of hedging (Allayannis & Ofek, 2001).