The influence of derivatives usage on firm value
In contemporary business management, an increasing number of firms use derivative instruments to hedge financial risks, including interest rate, foreign exchange rate and commodity price risk. Such hedging activities add to firm value by alleviating market imperfections, the presence of which provides an incentive to hedge. However, derivative instruments can also be used for speculation as well as hedging, magnifying risk and potentially reducing firm value. An awareness of the effectiveness of derivatives usage during various economic periods or in various industries, is also of value and can ultimately result in better hedging and even speculation strategies. In this thesis, we investigate non-financial firms in seven developed countries from 2007 to 2016, and apply fixed effects regression analysis, propensity score matching and difference-in-difference models to examine the relationship between derivatives usage and firm value. The impact of different categories of derivatives usage on firm value is found to differ by country. In particular, although the use of interest derivatives is found to damage firm value worldwide, currency derivative usage appears to increase firm value except in the US and Germany, while the use of commodity derivatives is shown to add to firm value firm only in Germany and Australia.