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Market-Based Solutions to Vital Economic Issues
Research
Aug 1, 2011

The Effects of Derivatives on Firm Risk and Value

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.

Citation:

Bartram, S. M., Brown, G. W., & Conrad, J. (2011). The effects of derivatives on firm risk and value. Journal of Financial and Quantitative Analysis, 46(04), 967–999. doi:10.1017/S0022109011000275

 

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals. 


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