Does corporate hedging attract foreign institutional investors? Evidence from international firms

We study how corporate hedging affects the demand of foreign institutional investors. We collect measures of foreign exchange hedging and interest rate hedging for a comprehensive sample of international companies. We document a strongly positive relationship between foreign institutional demand and corporate hedging. The effect of hedging is concentrated in the demand of non-bank-affiliated investors, whereas bank-affiliated investors are less sensitive to it. The impact of hedging on foreign institutional ownership is higher for less transparent countries, and a low quality of corporate governance amplifies the effect of lower transparency. We address the potential endogeneity of hedging with an instrumental variable specification that exploits the changes in hedging induced by changes in the asset quality of relationship banks. We also show that the pre-IPO hedging policy is positively related to international investor demand after the IPO.