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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

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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  • Fauver, Larry & Naranjo, Andy, 2010. "Derivative usage and firm value: The influence of agency costs and monitoring problems," Journal of Corporate Finance, Elsevier, vol. 16(5), pages 719-735, December.
  • Handle: RePEc:eee:corfin:v:16:y:2010:i:5:p:719-735
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    Cited by:

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    3. Fosu, Samuel & Danso, Albert & Ahmad, Wasim & Coffie, William, 2016. "Information asymmetry, leverage and firm value: Do crisis and growth matter?," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 140-150.
    4. Dionne, Georges & Gueyie, Jean-Pierre & Mnasri, Mohamed, 2016. "Dynamic Corporate Risk Management: Motivations and Real Implications," Working Papers 16-2, HEC Montreal, Canada Research Chair in Risk Management, revised 08 Aug 2018.
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    6. 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.
    7. 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.
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    10. Dionne, Georges & Mnasri, Mohamed, 2018. "Real implications of corporate risk management: Evidence from U.S. oil producers," Working Papers 18-5, HEC Montreal, Canada Research Chair in Risk Management.
    11. Merkel, Matthias F., 2018. "Foreign exchange derivative use and firm value: Evidence from German non-financial firms," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe B-33-18, University of Passau, Faculty of Business and Economics.
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