Empirical Evidence on the Corporate Use of Derivatives

Henk Berkman · Michael Eric Bradbury

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Risk Management in Financial Firms Corporate Finance and Governance Financial Analysis and Corporate Governance

Abstract

Theory indicates that hedging can increase firm value by reducing expected taxes, expected costs of financial distress, and other agency costs. Prior research, based on survey data, has found only weak evidence consistent with theory. This study provides evidence on the corporate use of derivative instruments from the 1994 audited financial statements of 116 firms. We use the fair and contract values scaled by the market value of each firm to measure the extent of derivatives usage and generally in line with theoretical models of corporate risk management.

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References

1958The Cost of Capital, Corporation Finance and the Theory of Investment 1977Determinants of corporate borrowing 1985The Determinants of Firms' Hedging Policies 1993Risk Management: Coordinating Corporate Investment and Financing Policies 1994Financial Distress and Corporate Performance 1993On the Determinants of Corporate Hedging 1977BANKRUPTCY COSTS: SOME EVIDENCE 1984A Further Empirical Investigation of the Bankruptcy Cost Question

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2005Hedging or Market Timing? Selecting the Interest Rate Exposure of Corporate Debt 2011The use of foreign currency derivatives, corporate governance, and firm value around the world 1998Agency Costs of Corporate Risk Management 2000Risk Measurement and Hedging: With and without Derivatives 2012Financial Flexibility, Risk Management, and Payout Choice 2002How Firms Should Hedge

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