Bartram, Söhnke M., Brown, Gregory W. and Conrad, Jennifer. (2011) The effects of derivatives on firm risk and value. Journal of Financial and Quantitative Analysis, Vol.46 (No.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:	Journal Article
Subjects:	H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School
Journal or Publication Title:	Journal of Financial and Quantitative Analysis
Publisher:	Cambridge University Press
ISSN:	0022-1090
Official Date:	2011
Dates:	Date Event 2011 Published
Volume:	Vol.46
Number:	No.4
Number of Pages:	33
Page Range:	pp. 967-999
Identification Number:	10.1017/S0022109011000275
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access
URI:	http://wrap.warwick.ac.uk/id/eprint/44744

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