Hedging behavior in small and medium-sized enterprises: The role of unobserved heterogeneity

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Abstract

We investigate factors that drive derivative usage in small and medium-sized enterprises (smes). The influence of these factors on hedging behavior cannot a priori be assumed equal for all smes. To address this heterogeneity, a generalized mixture regression model is used which classifies firms into segments, so that the hedging response to the determinants of derivative usage is the same within each segment. Using a unique data set of 415 smes, containing both accounting and experimental data, we find that factors like risk exposure, risk perception, risk attitude, and the decision-making unit, among others are useful in explaining hedging behavior. However, the effects of these factors are not homogeneous across all managers, and the roots of the heterogeneity can partially be traced to differences in attitudes, perceptions, and to differences in ownership structure.
Original languageEnglish
Pages (from-to)951-978
Number of pages28
JournalJournal of Banking & Finance
Volume28
Issue number5
DOIs
Publication statusPublished - May 2004
Externally publishedYes

Keywords

  • derivatives usage
  • hedging behavior
  • unobserved heterogeneity
  • SMALL BUSINESS FINANCE
  • GOLD MINING-INDUSTRY
  • RISK-MANAGEMENT
  • FUTURES MARKETS
  • NORMAL-DISTRIBUTIONS
  • MAXIMUM-LIKELIHOOD
  • REGRESSION-MODELS
  • DERIVATIVES
  • PRICE
  • DETERMINANTS

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