Asymmetric information and corporate risk management by using foreign currency derivatives

We examine how information asymmetry affects a firm\u27s incentive to hedge versus speculate by using foreign currency derivatives. We find a quadratic relation between asymmetric information and a firm\u27s risk management activities. In particular, we find that the firms facing medium level of information asymmetry are more likely to hedge, while firms with very high and low levels of asymmetric information tend to speculate. Moreover, we find that our results hold primary for firms operating in highly competitive industries. © 2012 World Scientific Publishing Co. and Center for Pacific Basin Business, Economics and Finance Research