This research presents a comprehensive analysis of natural hedging strategies employed by firms to mitigate financial risks. First, we conduct a meta-analysis of 54 empirical studies to examine the determinants of natural hedging. Our findings reveal that the firm's risk exposure, economies of scale, and strategic considerations prompt a natural hedge, whereas its magnitude is also explained by financial distress and under investment theory. The factors influencing natural hedging differ across geographical regions and impact the choice of natural hedging strategies. Data sources, model specifications, econometric methods, and journal rankings further explain heterogeneity in effect sizes across studies.
Secondly, we examine the relationship between natural hedging and its determinants. We examine the factors influencing firms' choice of natural hedging strategies, focusing on foreign debt, investment, and investor involvement. Findings reveal how firm-specific characteristics dynamically impact natural hedging strategy selection.
Third, we examine whether the relationship between the natural hedging index and its determinants is non-linear. Applying a panel quantile approach with non-additive fixed effects, we categorize firms into subgroups (parent-controlled, jointly-controlled, and locally-controlled) based on the level of international diversification. We find that the relationship between natural hedging and its determinants varies with the change in control structure. The non-linearity in the relationship is due to the interconnection between natural hedging and the firm's operations.
Lastly, we assess the influence of natural hedging on firm value, incorporating the mediating role of financial derivatives and the moderating impact of macroeconomic variables. Natural hedging notably impacts firm value, while the impact on financial derivatives is contingent on the nature of the natural hedging strategy. High transactional involvement renders the relationship complementary, while a strategy with fewer and flexible transactions signifies a substitutive relation. An inflexible, cash flow-specific natural hedging strategy, like foreign debt, can result in mutually exclusive hedging forms. Further, natural hedging stabilizes firm value irrespective of macroeconomic fluctuations.