The effects of competitive environments on corporate selective hedging behaviour

Abstract

This thesis examines corporate derivative use and selective hedging behaviour taking into account the competitive environment in which the firm and its decision makers are involved. The effects of competitive environments are investigated from different levels. One is the industry level which considers the predation risk that firms could encounter because of product market competition. The other is at the board level; specifically the conflicts in board decision making because of board gender diversity. The test results support the explanatory power of both predation risk and board gender diversity on corporate selective hedging behaviour. Firms encountering higher predation risk are more likely to use derivatives to time the market for extra returns. Female participation on boards encourages selective hedging behaviour. However, adverse effects appear stronger on selective hedging when more females are appointed as directors. Once a critical mass is achieved (a board with over 20% or at least three female members), the intensity of selective hedging behaviour is significantly mitigated. A bell-shaped relationship between board gender diversity and selective hedging behaviour is found. Though a competitive environment has different levels and dimensions, by analysing this issue from both external and internal perspectives, this study emphasises the importance of contextual settings in discussing corporate decision making and risk management.