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The Use of Derivatives as a Risk Management Instrument: Evidence from Indonesian Non-Financial Firms

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  • I Wayan Nuka Lantara

    (Faculty of Economics and Business, Universitas Gadjah Mada, Indonesia)

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    Abstract

    This paper provides empirical evidence of firm-specific factors determining the decision to use derivatives and the level of usage for the case of Indonesia. The findings show that the participation rate in the use of derivatives is 15.8%, much lower compared to those found in developed countries. Using Probit and Tobit regression models, the results indicate that the use of derivatives is positively associated with firm size, market-to-book value, bank-firm relationship, and the involvement of the firm in foreign business activity, but negatively linked to liquidity.

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    Bibliographic Info

    Article provided by College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan in its journal International Journal of Business and Economics.

    Volume (Year): 11 (2012)
    Issue (Month): 1 (June)
    Pages: 45-62

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    Handle: RePEc:ijb:journl:v:11:y:2012:i:1:p:45-62

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    Postal: 100 Wenhwa Road, Seatwen, Taichung
    Web page: http://www.ijbe.org/
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    Related research

    Keywords: derivatives; risk management; hedging;

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    1. Hoa Nguyen & Robert Faff, 2003. "Further Evidence on the Corporate Use of Derivatives in Australia: The Case of Foreign Currency and Interest Rate Instruments," Australian Journal of Management, Australian School of Business, vol. 28(3), pages 307-317, December.
    2. Guay, Wayne & Kothari, S. P, 2003. "How much do firms hedge with derivatives?," Journal of Financial Economics, Elsevier, vol. 70(3), pages 423-461, December.
    3. Karen Benson & Barry Oliver, 2004. "Management Motivation for Using Financial Derivatives in Australia," Australian Journal of Management, Australian School of Business, vol. 29(2), pages 225-242, December.
    4. Tufano, Peter, 1996. " Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry," Journal of Finance, American Finance Association, vol. 51(4), pages 1097-1137, September.
    5. Hakenes, Hendrik, 2003. "Banks as Delegated Risk Managers," Sonderforschungsbereich 504 Publications 03-13, Sonderforschungsbereich 504, Universit├Ąt Mannheim & Sonderforschungsbereich 504, University of Mannheim.
    6. Andrew K. Prevost & Lawrence C. Rose & Gary Miller, 2000. "Derivatives Usage and Financial Risk Management in Large and Small Economies: A Comparative Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(5&6), pages 733-759.
    7. Elyasiani, Elyas & Goldberg, Lawrence G., 2004. "Relationship lending: a survey of the literature," Journal of Economics and Business, Elsevier, vol. 56(4), pages 315-330.
    8. Byrd, John W. & Hickman, Kent A., 1992. "Do outside directors monitor managers? *1: Evidence from tender offer bids," Journal of Financial Economics, Elsevier, vol. 32(2), pages 195-221, October.
    9. Brown, Gregory W., 2001. "Managing foreign exchange risk with derivatives," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 401-448, May.
    10. Bodnar, Gordon M. & Gentry, William M., 1993. "Exchange rate exposure and industry characteristics: evidence from Canada, Japan, and the USA," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 29-45, February.
    11. G. David Haushalter, 2000. "Financing Policy, Basis Risk, and Corporate Hedging: Evidence from Oil and Gas Producers," Journal of Finance, American Finance Association, vol. 55(1), pages 107-152, 02.
    12. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. " Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-58, December.
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