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

WBS Finance Group Research Paper No. 30

52 Pages Posted: 23 Dec 2003 Last revised: 18 Dec 2019

See all articles by Söhnke M. Bartram

Söhnke M. Bartram

University of Warwick; Centre for Economic Policy Research (CEPR)

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 Rudolf, 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, WBS Finance Group Research Paper No. 30, Available at SSRN: https://ssrn.com/abstract=471245 or http://dx.doi.org/10.2139/ssrn.471245

Söhnke M. Bartram

University of Warwick ( email )

Warwick Business School
Finance Group
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 (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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