Aversion to the use of foreign exchange hedging in state-owned enterprises: Evidence from China

Using a sample of state-owned enterprises (SOEs) listed in China from 2006 to 2017, we examine the impact of state ownership on foreign exchange (forex) hedging. We find that SOEs engage in forex hedging both less frequently and to a lesser extent than non-SOEs. These results are robust to a series of additional tests, such as difference-in-differences analyses, instrumental variable tests, and alternative explanation tests. The effect is particularly pronounced for SOEs with weaker internal controls, fewer professional auditors, and less marketization. We further find that the use of currency derivatives by SOEs hinders the promotion of managers. Furthermore, the prevalence of subjective performance evaluation in SOEs, as opposed to objective performance measures, affects managers' decisions regarding hedging, as evidenced by negative promotion–performance sensitivity when using financial derivatives. Overall, our study sheds light on the aversion of SOEs to forex hedging, providing insight into the conservative decision-making tendencies of SOE managers under political governance.