International Evidence on Financial Derivatives Usage
Söhnke M. Bartram
Warwick Business School - Department of Finance
Gregory W. Brown
University of North Carolina (UNC) at Chapel Hill - Finance Area
October 1, 2006
Financial Management, Vol. 38, No. 1, pp. 185-206, Spring 2009
AFA 2004 San Diego Meetings
EFA 2003 Glasgow
Popular theories of financial risk management indicate that nonfinancial corporations may use derivatives to lower the expected costs of financial distress, to coordinate cash flows with investment policy, or because of agency conflicts between managers and owners. Using a new database of 7,319 firms in 50 countries, we show that traditional tests of these explanations result in little explanatory power for determining which firms use derivatives. Instead, risk management choices are determined endogenously with other financial and operating decisions in ways that are intuitive but difficult to attribute to specific theories. This finding has several important implications. First, it explains why identifying specific motivations for financial risk management is difficult. Second, it indicates that derivative usage can have significant effects on other firm decisions such as the level and maturity of debt, dividend policy, holdings of liquid assets, and the degree of operating hedging. Third, it implies that future empirical and theoretical research on corporate risk management needs to examine a broader array of firm characteristics and decisions to better isolate the role derivatives play in financial policy.
Number of Pages in PDF File: 52
Keywords: Derivatives, corporate finance, risk management, hedging, international finance
JEL Classification: G3, F4, F3working papers series
Date posted: December 23, 2003 ; Last revised: September 2, 2012
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