Aversion to the Use of Foreign Exchange Hedging in State-Owned Enterprises : Evidence from China

Financial derivatives are considered efficient risk management instruments that help firms avoid financial risks and improve firm value. Yet, based on a sample of publicly traded firms with foreign sales in China, we find that state-owned enterprises (SOEs) conduct derivative hedging both at a lower frequency and to a lower degree than non-SOEs. The effect is evident for SOEs with poor internal control, few professional auditors, and a low degree of external marketization. Upon analyzing the mechanism, we find that foreign exchange hedging is associated with a low probability of manager non-demotion in SOEs. It also impairs SOE managers’ performance evaluation reflected in CEO forced turnover-performance sensitivity. Overall, we shed light on the determinants of the use of financial derivatives in SOEs, the managerial incentives of which are affected by government policies