Foreign Debt Usage in Non-Financial Firms: a Horse Race between Operating and Accounting Exposure Hedging

Previous studies show that foreign exchange exposure from international sales can be hedged by foreign debt. We go beyond the foreign sales measure by using a unique database with detailed exposure information on Danish non-financial firms with international operations. Our results indicate that foreign debt is used to hedge foreign assets and subsidiaries (accounting exposure) as opposed to foreign sales (operating exposure). The paper adds to the literature on corporate hedging by highlighting the importance of accounting exposure in the hedging behavior of corporate managers and the perceived need to reduce risks due to currency mismatches between assets and liabilities.