Impact of Foreign Exchange Exposure and Shariah-compliant Status on Malaysian Firms’ Hedging Practice

Adilah A. Wahab, Ruzita Abdul-Rahim, Hawati Janor

Abstract


ABSTRACT

This study investigates the impact of foreign exchange (forex) exposure and Shariah-compliant status on firms’ decision to practise hedging. It employs panel multiple and multinomial logistic regression on 702 firm-year observations from 117 non-financial listed firms over the period from 2010 to 2015. The sample consists of 70% Shariah-compliant firms, representative of the 74%-85% Shariah-compliant firms listed on Bursa Malaysia during the study period. From the multinomial logistic regression, this study finds total and net foreign currency exposures are significant in predicting hedging for firms that practice one and two hedging instruments. Moreover, the results also reveal that Shariah-compliant status always significantly and directly influence firms that hedge, except for firms that use four hedging instruments. This study contributes to the literature by introducing direct measurements of foreign currency exposure which prove to be significant indicators of forex exposure. Accurate measurement of forex exposure is crucial as it has implications on the firms’ ability to predict its cash flows, commit to future projects, and subsequently, increase its value. Since firms do not disclose whether the instruments used are conventional or Shariah-compliant, this study assumes that all instruments are conventional and therefore, being Shariah-compliant hinder the firms from practising hedging. However, the results reveal those firms that hedge are indeed Shariah-compliant. This finding should raise a great concern among the Islamic capital market regulators to require stricter rules and greater transparency among Shariah-compliant firms.

Keywords: Foreign currency exposure; foreign currency hedging; Shariah-compliant status; foreign cash flows; Malaysia non-financial firms

ABSTRAK

Kajian ini mengkaji kesan pendedahan matawang asing dan status patuh Shariah terhadap keputusan syarikat mengamalkan lindung nilai. Ia mengunakan kaedah analisis regresi panel logistik dan multinominal terhadap 702 tahun-pemerhatian dari 117 syarikat bukan kewangan yang tersenarai di Bursa Malaysia bagi tempoh 2010 hingga 2015. Sampel mengandungi 70% syarikat patuh Shariah, mewakili 74%-85% syarikat patuh Shariah yang tersenarai di Bursa Malaysia sepanjang tempoh kajian. Dari regresi logistik multinomial, kajian ini mendapati jumlah keseluruhan dan jumlah bersih aliran tunai asing adalah signifikan dalam meramal lindung nilai bagi syarikat yang menggunakan satu dan dua instrumen lindung nilai. Selain itu, hasil kajian juga menunjukkan status patuh Shariah sentiasa mempengaruhi keputusan firma untuk mengamalkan lindung nilai secara signifikan dan langsung, kecuali bagi syarikat yang menggunakan empat instrumen lindung nilai. Kajian ini menyumbang kepada literatur dengan mengemukakan ukuran pendedahan matawang asing yang langsung, yang terbukti berfungsi sebagai indikator pendedahan matawang asing yang signifikan. Ukuran pendedahan matawang asing yang tepat adalah kritikal kerana ia memberi implikasi terhadap kemampuan syarikat meramalkan akiran tunainya, komited kepada projek di masa hadapan, dan seterusnya nilai firma. Memandangkan syarikat tidak melaporkan sama ada instrumen lindung nilai yang digunakan adalah konvensional atau patuh Shariah, kajian ini mengandaikan semua instrumen lindung nilai adalah konvensional dan dengan itu, status patuh Shariah menyebabkan syarikat menjauhi amalan lindung nilai. Bagaimanapun, hasil kajian menunjukkan syarikat patuh Shariah termasuk antara syarikat yang mengamalkan lindung nilai. Penemuan ini wajar menimbulkan kebimbangan dalam kalangan pengawal selia pasaran modal Islam kerana ia menggambarkan wujud keperluan untuk mengetatkan kriteria dan peraturan dan meningkatkan ketelusan pelaporan dalam kalangan syarikat patuh Shariah.

Kata kunci: Pendedahan matawang asing; lindung nilai matawang asing; status patuh Shariah; aliran tunai asing; syarikat bukan kewangan Malaysia.


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