Hostname: page-component-cb9f654ff-h4f6x Total loading time: 0 Render date: 2025-08-03T13:51:10.272Z Has data issue: false hasContentIssue false
  • English
  • Français

Are Corporations Reducing or Taking Riskswith Derivatives?

Published online by Cambridge University Press:  06 April 2009

Ludger Hentschel  and
S. P. Kothari
Get access Rights & Permissions [Opens in a new window]

Abstract

Public discussion about corporate use of derivativesfocuses on whether firms use derivatives to reduceor increase firm risk. In contrast, empiricalacademic studies of corporate dervatives use take itfor granted that firms hedge with derivatives. Usingdata from financial statements of 425 large U.S.corporations, we investigate whether firmssystematically reduce or increase their riskinesswith derivatives. We find that many firms managetheir exposures with large derivatives positions.Nonetheless, compared to firms that do not usefinancial derivatives, firms that use derivativesdisplay few, if any, measurable differences in riskthat are associated with the use of derivatives.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 36 , Issue 1 , March 2001 , pp. 93 - 118
Copyright
Copyright © School of Business Administration, University of Washington 2001

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

Footnotes

*

Simon Graduate School of Business Administration,University of Rochester, Rochester, NY 14627; andSloan School of Management, MassachusettsInstitute of Technology, Cambridge, MA 02142,respectively. We thank Jeffref Pontiff (associateeditor and referee), Paul Gompers, Stacey Kole,John Long, Bill Schwert, Jay Shanken, Cliff Smith,and seminar participants at the Berkeley Programin Finance, the CEPR Summer Symposium in Finance,the Chicago Board of Trade, the INQUIREConference, and the London School of Economics forhelpful comments. Anjali Arora and Eric Kim (underan Olin Fellowship) provided excellent researchassistance. We gratefully acknowledge financialsupport from the Bradley Policy Research Centerand the John M. Olin Foundation.

References

Banz, R. W. “The Relationship between Return and Market Value of Common Stocks.” Journal of Financial Economics, 9 (1981), 3–18.10.1016/0304-405X(81)90018-010.1016/0304-405X(81)90018-0CrossRefGoogle Scholar
Black, F., and Scholes, M. S.. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, 81 (1973), 637–654.10.1086/260062CrossRefGoogle Scholar
Bodnar, G. M., and Marston, R. C.. “Wharton CIBC Wood Gundy 1995 Survey of Derivatives Usage by U.s. Non-Financial Firms.” Wharton School, Univ. of Pennsylvania, Philadelphia, PA (1996)Google Scholar
Bodnar, G. M., and Marston, R. C. “Wharton CIBC Wood Gundy 1995 Survey of Derivatives U. S. Non-Financial Firms.” Wharton School, Univ. of Pennsylvania, Philadelphia, PA (1998)Google Scholar
Booth, J. R.; Smith, R. L.; and Stolz, R. W.. “Use of Interest Rate Futures by Financial Institutions.” Journal of Bank Research, 15 (1984), 15–20.Google Scholar
Christie, A. A “The Stochastic Behavior of Common Stock Variances: Value, Leverage, and Interest Rate Effects.” Journal of Financial Economics, 10 (1982), 407–432.10.1016/0304-405X(82)90018-6CrossRefGoogle Scholar
DeMarzo, P., and Duffie, D.. “Corporate Incentives for Hedging and Hedge Accounting” Unpubl. Paper, Northwestern Univ. (1992).Google Scholar
Eccher, E. A.; Ramesh, k. R.; and Thiagarajan, S. R.. “Fair Value Disclosures by Bank Holding Companies.” Journal of Accounting and Economics, 22 (1997), 79–117.10.1016/S0165-4101(96)00438-7CrossRefGoogle Scholar
Financial Accounting Standards Board. “Statement of Financial Accounting Standard No. 119: Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments.” Stamford, CT: Financial Accounting Standards Board (1994).Google Scholar
Froot, K. A.; Scharfstein, D. S.; and Stein, J. C.. “Risk Management: Coordinating Corporate Investment and Financing Policies.” Journal of Finance, 48 (1993), 1629–1658.10.2307/232906210.1111/j.1540-6261.1993.tb05123.xCrossRefGoogle Scholar
Geczy, C.; Minton, B. A.; and Schrand, C. M.. “Why Firms Hedge: Distinguishing among Existing Theories” Journal of Finance, 52 (1997), 1323–1354.10.2307/232943810.2307/2329438CrossRefGoogle Scholar
Gorton, G., and Rosen, R. J.. “Banks and Derivatives.” Unpubl. Paper. Rodney L. White center fro Financial Research, The Wharton School of the Univ. of Pennsylvania (1995).CrossRefGoogle Scholar
Jensen, M. C., and Meckling, W. H.. “Theory of the Firm: Managerial Behavior, Agency Costs and Capital Structure.” Journal of Finacial Economics, 3 (1976), 305–360.10.1016/0304-405X(76)90026-X10.1016/0304-405X(76)90026-XCrossRefGoogle Scholar
Koski, J., Pontiff, J. “How are Derivatives Used? Evidence from the Mutual Industry.” Journal of Finance, 54 (1999), 791–816.10.1111/0022-1082.00126CrossRefGoogle Scholar
Maddala, G. S.. Introduction to Econometrics. New York, NY: Macmillan Publishing Co. (1988).Google Scholar
Mian, S. L. “Evidence on Corporate Hedging Policy.” Journal of Financial and Quantitative Analysis, 31 (1996), 419–439.10.2307/2331399S0022109000000636CrossRefGoogle Scholar
Myers, S. C. “Determinants of Corporate Borrowing.” Journal of Financial Economics, 5 (1977), 147–175.10.1016/0304-405X(77)90015-0CrossRefGoogle Scholar
Nance, D. R.; Smith, C. W. Jr,; and Smithson, C. W.. “On the Determinants of Corporate Hedging.” Journal of Finance, 48 (1993), 267–28410.2307/2328889CrossRefGoogle Scholar
Scholes, M. S., and Williams, J. “Estimating Betas from Nonsynchronous Data.” Journal of Financial Economics, 5 (1977), 309–327.10.1016/0304-405X(77)90041-110.1016/0304-405X(77)90041-1CrossRefGoogle Scholar
Schrand, C. M. “An Evaluation of the Effects of SFAS NO. 80 on Interest Rate Risk Management in the Savings and Loan Industry.” Unpubl. Paper, Univ. of Chicago (1993).Google Scholar
Scott, W. L., and Peterson, R. L.. “Interest Rate Risk and Equity Value of Hedged and Unhedged Financial Intermediaries.” Journal of Financial Research, 9 (1986), 325–329.CrossRefGoogle Scholar
Smith, C. W. Jr, and Stulz, R. M.. “The Determinants of Firms' Hedging Policies.” Journal of Financial Quantitative Analysis, 20 (1985), 391–405.10.2307/2330757S002210900001177710.2307/2330757CrossRefGoogle Scholar
Stulz, R. M. “Optimal Hedging Policies.” Journal of Financial and Quantitative Analysis, 19 (1984), 127–14010.2307/2330894S0022109000011200CrossRefGoogle Scholar
Stulz, R. M. “Rethinking Risk Management.” Journal of Applied Corporate Finance, 9 (1996), 8–2410.1111/j.1745-6622.1996.tb00295.xCrossRefGoogle Scholar
Tufano, P. “Who Manages Risk? An Empirical Examination of Risk Management Practice in the Gold Mining Industry.” Journal of Finance, 51 (1996a), 1097–113910.2307/232938910.1111/j.1540-6261.1996.tb04064.xCrossRefGoogle Scholar
Tufano, P. “The Determinants of stock price Exposure: Financial Engineering and the Gold Mining Industry.” Unpubl. Paper, Harvard Business School, Harvard Univ., Cambridge, MA (1996b).Google Scholar
Veit, E. T., and Reiff, W. W.. “Commercial Banks and Interest Rate Futures: A Hedging Survey.” Journal of Futures Markets, 2 (1983), 283–29310.1002/fut.399003030410.1002/fut.3990030304CrossRefGoogle Scholar
White, H. “A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity.” Econometrica, 48 (1980), 817–838.10.2307/1912934CrossRefGoogle Scholar