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The Impact of Institutional Differences on Derivatives Usage

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Author Info
Bodnar, G.M.
Jong, A. de
Macrae, V. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
Abstract

This paper examines the influence of institutional differences on risk management practices in the US and the Netherlands. This comparison is interesting because the Dutch firms' institutional setting differs from the US setting with respect to shareholder orientation, international trade, disclosure regulation, and reliance on financial markets. In contrast with previous comparisons, we apply a matching and weighting strategy that corrects for differences over industry and size classes across the Dutch and US samples. After these corrections, the remaining results can be attributed more directly to institutional differences. We find that due to the greater openness of the Netherlands, Dutch firms hedge more financial risk, especially more currency risk, than US firms. Dutch firms, however, show a lower level of concern over derivatives usage, which is consistent with having less active minority shareholders and less strict disclosure requirements than the US has. Dutch firms focus le ss on stabilizing accounting earnings with derivatives than US firms, which is likely attributable to the strong shareholder orientation in the US versus the stakeholder orientation in the Netherlands. Whereas Dutch firms tend to rely almost exclusively on OTC-transactions, US firms use exchange-traded derivatives and more counter-parties. This results in US firms imposing stricter requirements on counter-party rating for derivatives transactions. This distinction can be attributed to the differences in the financial environments between the US and the Netherlands. These, and other results, strongly suggest that institutional differences between the US and the Netherlands have an important impact on risk management practices and derivatives use across US and Dutch firms.

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Paper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam. in its series Research Paper with number ERS-2001-89-F&A Revision_Date: 2009-07-29.

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Date of creation: 23 Jan 2001
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Handle: RePEc:dgr:eureri:2001152

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Related research
Keywords: risk management; derivatives; hedging; international finance;

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References listed on IDEAS
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  1. Gordon M. Bodnar & Gregory S. Hayt & Richard C. Marston, 1998. "1998 Wharton Survey of Financial Risk Management by US Non-Financial Firms," Financial Management, Financial Management Association, vol. 27(4), Winter.
  2. Stulz, Ren? M., 1984. "Optimal Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(02), pages 127-140, June. [Downloadable!]
  3. Loderer, Claudio & Pichler, Karl, 2000. "Firms, do you know your currency risk exposure? Survey results," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 317-344, November. [Downloadable!] (restricted)
  4. Smith, Clifford W. & Stulz, Ren? M., 1985. "The Determinants of Firms' Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 391-405, December. [Downloadable!]
  5. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1992. "Risk Management: Coordinating Corporate Investment and Financing Policies," NBER Working Papers 4084, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Boersma, J. & Veld, C., 1995. "Het gebruik van financiele derivaten door grote Nederlandse ondernemingen," Research Memorandum 700, Tilburg University, Faculty of Economics and Business Administration. [Downloadable!]
  7. Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, 04. [Downloadable!] (restricted)
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