The Effects of Derivatives on Firm Risk and Value

52 Pages Posted: 14 Feb 2007 Last revised: 23 Dec 2019

See all articles by Söhnke M. Bartram

Söhnke M. Bartram

Warwick Business School - Department of Finance; Centre for Economic Policy Research (CEPR)

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area

Jennifer S. Conrad

University of North Carolina Kenan-Flagler Business School

Multiple version iconThere are 3 versions of this paper

Date Written: January 12, 2009

Abstract

Using a large sample of non-financial firms from 47 countries, we examine the effect of derivative use on firm risk and value. We control for endogeneity by matching users and non-users on the basis of their propensity to hedge. We also use a new technique to estimate the effect of omitted variable bias on our inferences. We find strong evidence that the use of financial derivatives reduces both total risk and systematic risk. The effect of derivative use on firm value is positive but more sensitive to endogeneity and omitted variable concerns. However, hedging with derivatives is associated with significantly higher value, abnormal returns, and larger profits during the economic down-turn in 2001-2002, suggesting firms are hedging downside risk.

Keywords: derivatives, risk management, hedging, international finance, risk, value

JEL Classification: G3, F4, F3

Suggested Citation

Bartram, Söhnke M. and Brown, Gregory W. and Conrad, Jennifer S., The Effects of Derivatives on Firm Risk and Value (January 12, 2009). WBS Finance Group Research Paper No. 72. Available at SSRN: https://ssrn.com/abstract=1210422 or http://dx.doi.org/10.2139/ssrn.1210422

Söhnke M. Bartram

Warwick Business School - Department of Finance ( email )

Coventry, CV4 7AL
United Kingdom
+44 (24) 7657 4168 (Phone)
+1 425 952 1070 (Fax)

HOME PAGE: http://go.warwick.ac.uk/sbartram/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Jennifer S. Conrad (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

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