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The Effects of Derivatives on Firm Risk and Value

  • Söhnke M. Bartram (a1), Gregory W. Brown (a2) and Jennifer Conrad (a3)
Abstract
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.

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This list contains references from the content that can be linked to their source. For a full set of references and notes please see the PDF or HTML where available.

S. M. Bartram ; G. W. Brown ; and R. M. Stulz . “Why Are U.S. Stocks More Volatile?Journal of Finance, forthcoming (2011).

P. R Rosenbaum . Observational Studies, 2nd ed.New York, NY: Springer-Verlag (2002).

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Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
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