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The Impact of Institutional Differences on Derivatives Usage: A Comparative Study of US and Dutch Firms

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  • Bodnar, G.M.
  • Jong, A. de
  • Macrae, V.

    (Tilburg University, Center for Economic Research)

Abstract

This paper tests the influence of institutional differences on risk management practices.Several survey studies have investigated derivatives usage for risk management purposes in the US (see, among others, Bodnar, Hayt, Marston and Smithson, 1995 and Bodnar, Hayt and Marston, 1996, 1998).In this paper, we compare derivative practices of US and Dutch firms.This comparison is interesting because the institutional setting for Dutch firms differs from the US setting with respect to shareholder orientation, international trade, disclosure regulation, and the reliance on financial markets.In a number of survey studies additional countries have been studied, such as New Zealand (Berkman, Bradbury and Magan, 1997), Sweden (Alkebäck and Hagelin, 1999) and Germany (Bodnar and Gebhardt, 1999).In contrast with these papers, we facilitate a comparison by applying a matching and a weighting strategy, which corrects for different distributions over industry and size classes in the Dutch and US samples.After these corrections, the remaining results can be attributed to institutional differences.We find that Dutch firms hedge more financial risk. Because of the greater openness of the Netherlands, Dutch firms experience far more foreign exchange exposure and hedge more currency risk.US firms have more concerns regarding derivative usage, which may be linked to the stricter disclosure requirements in the US.US firms also focus more on accounting earnings, which may be attributable to the shareholder orientation in the US versus the stakeholder orientation in the Netherlands.Whereas Dutch firms tend to rely on OTC-transactions, US firms use exchange-traded derivatives and therefore require a higher counter party rating for derivatives transactions. This distinction can be accredited to the differences in the financial environments between the US and the Netherlands.The aforementioned results indicate that institutional differences between the US and the Netherlands have a significant effect on the risk management practices and derivatives use of US and Dutch firms.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2001-62.

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Date of creation: 2001
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Handle: RePEc:dgr:kubcen:200162

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Keywords: risk management; hedging; derivatives;

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References

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  1. 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.
  2. 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.
  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.
  4. Chris Mallin & Kean Ow-Yong & Martin Reynolds, 2001. "Derivatives usage in UK non-financial listed companies," The European Journal of Finance, Taylor & Francis Journals, vol. 7(1), pages 63-91.
  5. Smith, Clifford W. & Stulz, René M., 1985. "The Determinants of Firms' Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 391-405, December.
  6. Stulz, René M., 1984. "Optimal Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(02), pages 127-140, June.
  7. Boersma, J. & Veld, C.H., 1995. "Het gebruik van financiële derivaten door grote Nederlandse ondernemingen," Research Memorandum 700, Tilburg University, Faculty of Economics and Business Administration.
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Cited by:
  1. Bartram, Söhnke M., 2004. "The Use of Options in Corporate Risk Management," MPRA Paper 6663, University Library of Munich, Germany.
  2. Luis Berggrun, 2005. "Currency Hedging for a Dutch Investor: The Case of Pension Funds and Insurers," DNB Working Papers 054, Netherlands Central Bank, Research Department.
  3. Fabling, Richard & Grimes, Arthur, 2008. "Do Exporters Cut the Hedge? Who Hedges, When and Why?," Occasional Papers 08/2, Ministry of Economic Development, New Zealand.
  4. Bj�rn D�hring, 2008. "Hedging and invoicing strategies to reduce exchange rate exposure - a euro-area perspective," European Economy - Economic Papers 299, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  5. Allayannis, George & Lel, Ugur & Miller, Darius P., 2012. "The use of foreign currency derivatives, corporate governance, and firm value around the world," Journal of International Economics, Elsevier, vol. 87(1), pages 65-79.
  6. Pramborg, Bengt, 2005. "Foreign exchange risk management by Swedish and Korean nonfinancial firms: A comparative survey," Pacific-Basin Finance Journal, Elsevier, vol. 13(3), pages 343-366, June.
  7. Hagelin, Niclas & Pramborg, Bengt, 2006. "Empirical evidence concerning incentives to hedge transaction and translation exposures," Journal of Multinational Financial Management, Elsevier, vol. 16(2), pages 142-159, April.
  8. Brozynski, Torsten & Menkhoff, Lukas & Schmidt, Ulrich, 2003. "The Use of Momentum, Contrarian and Buy-&-Hold Strategies: Survey Evidence from Fund Managers," Hannover Economic Papers (HEP) dp-290, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.

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