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Derivative usage and firm value: The influence of agency costs and monitoring problems

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  • Fauver, Larry
  • Naranjo, Andy
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    Abstract

    Using derivative usage data on over 1746 firms headquartered in the U.S. during the 1991 through 2000 time period, we find that firms with greater agency and monitoring problems (i.e., firms that are less transparent, face greater agency costs, have weaker corporate governance, larger information asymmetry problems, and overall poorer monitoring) exhibit a negative association between Tobin's Q and derivative usage. The negative valuation effect is also economically significant with an impact of -8.4% on Tobin's Q from a one standard deviation change in the firm monitoring index. The results are robust to alternative specifications, time varying estimates, econometric procedures that correct for potential clustering of errors, endogeneity problems, and sample selection biases among other robustness checks discussed in the paper. We conclude that derivative usage has a negative impact on firm value in firms with greater agency and monitoring problems.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 16 (2010)
    Issue (Month): 5 (December)
    Pages: 719-735

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    Handle: RePEc:eee:corfin:v:16:y:2010:i:5:p:719-735

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    Web page: http://www.elsevier.com/locate/jcorpfin

    Related research

    Keywords: Derivative usage Firm valuation Information asymmetry Agency costs Monitoring problems Behavioral finance;

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    Cited by:
    1. Lin, Chen & Lin, Ping & Zou, Hong, 2012. "Does property rights protection affect corporate risk management strategy? Intra- and cross-country evidence," Journal of Corporate Finance, Elsevier, vol. 18(2), pages 311-330.
    2. Brian Lucey & Britta Berghöfer, 2013. "Fuel Hedging, Operational Hedging and Risk Exposure– Evidence from the Global Airline Industry," The Institute for International Integration Studies Discussion Paper Series iiisdp433, IIIS.
    3. Wojakowski, Rafał M., 2012. "How should firms selectively hedge? Resolving the selective hedging puzzle," Journal of Corporate Finance, Elsevier, vol. 18(3), pages 560-569.
    4. Mohamed Mnasri & Georges Dionne & Jean-Pierre Gueyie, 2013. "The Maturity Structure of Corporate Hedging: the Case of the U.S. Oil and Gas Industry," Cahiers de recherche 1337, CIRPEE.

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