The Impact of Institutional Differences on Derivatives Usage

45 Pages Posted: 26 Feb 2008

See all articles by Abe de Jong

Abe de Jong

Rotterdam School of Management, Erasmus University; Monash University

Gordon M. Bodnar

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS)

Victor Macrae

Nyenrode University - Center for Finance

Date Written: 23 2001 1,

Abstract

This paper examines the influence of institutional differences on risk management practices in the US and the Netherlands. This comparison is interesting because the Dutch firms' institutional setting differs from the US setting with respect to shareholder orientation, international trade, disclosure regulation, and reliance on financial markets. In contrast with previous comparisons, we apply a matching and weighting strategy that corrects for differences over industry and size classes across the Dutch and US samples. After these corrections, the remaining results can be attributed more directly to institutional differences. We find that due to the greater openness of the Netherlands, Dutch firms hedge more financial risk, especially more currency risk, than US firms. Dutch firms, however, show a lower level of concern over derivatives usage, which is consistent with having less active minority shareholders and less strict disclosure requirements than the US has. Dutch firms focus le ss on stabilizing accounting earnings with derivatives than US firms, which is likely attributable to the strong shareholder orientation in the US versus the stakeholder orientation in the Netherlands. Whereas Dutch firms tend to rely almost exclusively on OTC-transactions, US firms use exchange-traded derivatives and more counter-parties. This results in US firms imposing stricter requirements on counter-party rating for derivatives transactions. This distinction can be attributed to the differences in the financial environments between the US and the Netherlands. These, and other results, strongly suggest that institutional differences between the US and the Netherlands have an important impact on risk management practices and derivatives use across US and Dutch firms.

Keywords: risk management, derivatives, hedging, international finance

JEL Classification: M, G3, G15

Suggested Citation

de Jong, Abe and Bodnar, Gordon M. and Macrae, Victor, The Impact of Institutional Differences on Derivatives Usage (23 2001 1,). ERIM Report Series Reference No. ERS-2001-89-F&A. Available at SSRN: https://ssrn.com/abstract=1097196

Abe De Jong

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T08-25
Rotterdam, 3000 DR
Netherlands
+31 10 408 1022 (Phone)

HOME PAGE: http://https://www.rsm.nl/people/abe-de-jong/

Monash University ( email )

900 Dandenong Rd
Room H3-56
Caulfield East, Victoria 3145
Australia

HOME PAGE: http://https://research.monash.edu/en/persons/abe-de-jong

Gordon M. Bodnar

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

1740 Massachusetts Avenue, NW
Washington, DC 20036
United States
202-663-7731 (Phone)
202-663-7718 (Fax)

Victor Macrae

Nyenrode University - Center for Finance ( email )

3621 BG Breukelen
Netherlands

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