International Evidence on Financial Derivatives Usage

Financial Management, Vol. 38, No. 1, pp. 185-206, Spring 2009

AFA 2004 San Diego Meetings

EFA 2003 Glasgow

52 Pages Posted: 23 Dec 2003 Last revised: 11 Mar 2014

Söhnke M. Bartram

Warwick Business School - Department of Finance

Gregory W. Brown

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

Frank Fehle

BlueCrest Capital

Date Written: October 1, 2006

Abstract

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.

Keywords: Derivatives, corporate finance, risk management, hedging, international finance

JEL Classification: G3, F4, F3

Suggested Citation

Bartram, Söhnke M. and Brown, Gregory W. and Fehle, Frank, International Evidence on Financial Derivatives Usage (October 1, 2006). Financial Management, Vol. 38, No. 1, pp. 185-206, Spring 2009; AFA 2004 San Diego Meetings; EFA 2003 Glasgow. Available at SSRN: https://ssrn.com/abstract=471245 or http://dx.doi.org/10.2139/ssrn.471245

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/

Gregory W. Brown (Contact Author)

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

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

Frank Rudolf Fehle

BlueCrest Capital ( email )

40 Grosvenor Place
London, SW1X 7AW
United Kingdom

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