Hedging behavior in small and medium-sized enterprises: The role of unobserved heterogeneity

Joost M.E. Pennings, Philip Garcia

Research output: Contribution to journalArticlepeer-review


We investigate factors that drive derivative usage in small and medium-sized enterprises (SMEs). The influence of these factors on hedging behavior cannot a priori be assumed equal for all SMEs. To address this heterogeneity, a generalized mixture regression model is used which classifies firms into segments, so that the hedging response to the determinants of derivative usage is the same within each segment. Using a unique data set of 415 SMEs, containing both accounting and experimental data, we find that factors like risk exposure, risk perception, risk attitude, and the decision-making unit, among others are useful in explaining hedging behavior. However, the effects of these factors are not homogeneous across all managers, and the roots of the heterogeneity can partially be traced to differences in attitudes, perceptions, and to differences in ownership structure.

Original languageEnglish (US)
Pages (from-to)951-978
Number of pages28
JournalJournal of Banking and Finance
Issue number5
StatePublished - May 2004


  • Derivatives usage
  • Hedging behavior
  • Unobserved heterogeneity

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


Dive into the research topics of 'Hedging behavior in small and medium-sized enterprises: The role of unobserved heterogeneity'. Together they form a unique fingerprint.

Cite this