The Effects of Derivatives on Firm Risk and Value
Journal of Financial and Quantitative Analysis, Vol. 46, No.4, August 2011, pp. 967-999.
52 Pages Posted: 20 Mar 2009 Last revised: 30 Aug 2021
Date Written: January 13, 2009
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 downturn in 2001-2002, suggesting firms are hedging downside risk.
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