Post by Sapphire Capital on Mar 26, 2009 0:14:53 GMT 4
The Effects of Derivatives on Firm Risk and Value
Jennifer S. Conrad
University of North Carolina at Chapel Hill
January 13, 2009
Abstract:
Using a large sample of non-financial firms from 47 countries, we examine the effect of derivative use on firm risk and value. We control for endogeneity by matching users and non-users on the basis of their propensity to hedge. 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, hedging with derivatives is associated with significantly higher value, abnormal returns, and larger profits during the economic downturn in 2001-2002, suggesting firms are hedging downside risk.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1342771
Jennifer S. Conrad
University of North Carolina at Chapel Hill
January 13, 2009
Abstract:
Using a large sample of non-financial firms from 47 countries, we examine the effect of derivative use on firm risk and value. We control for endogeneity by matching users and non-users on the basis of their propensity to hedge. 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, hedging with derivatives is associated with significantly higher value, abnormal returns, and larger profits during the economic downturn in 2001-2002, suggesting firms are hedging downside risk.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1342771