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The effects of derivatives on firm risk and value

Bartram, Sohnke and Brown, Gregory W. and Conrad, Jennifer S. (2011) The effects of derivatives on firm risk and value. Journal of Financial and Quantitative Analysis, 46 (4). pp. 967-999. ISSN 0022-1090

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    Abstract

    Using a large sample of nonfinancial firms from 47 countries, we examine the effect of derivative use on firm risk and value. We control for endogeneity by matching users and nonusers on the basis of their propensity to use derivatives. 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, using derivatives is associated with significantly higher value, abnormal returns, and larger profits during the economic downturn in 2001–2002, suggesting that firms are hedging downside risk.

    Item Type: Article
    Journal or Publication Title: Journal of Financial and Quantitative Analysis
    Additional Information: http://journals.cambridge.org/action/displayJournal?jid=JFQ The final, definitive version of this article has been published in the Journal, Journal of Financial and Quantitative Analysis, 46 (4), pp 967-999 2011, © 2011 Cambridge University Press.
    Subjects:
    Departments: Lancaster University Management School > Accounting & Finance
    ID Code: 45444
    Deposited By: ep_importer_pure
    Deposited On: 11 Jul 2011 19:32
    Refereed?: Yes
    Published?: Published
    Last Modified: 09 Apr 2014 22:32
    Identification Number:
    URI: http://eprints.lancs.ac.uk/id/eprint/45444

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