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

  • I Wayan Nuka Lantara

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

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    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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    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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    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. 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.
    3. Hakenes, Hendrik, 2004. "Banks as delegated risk managers," Journal of Banking & Finance, Elsevier, vol. 28(10), pages 2399-2426, October.
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    5. Brown, Gregory W., 2001. "Managing foreign exchange risk with derivatives," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 401-448, May.
    6. 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.
    7. Tadanori Yosano & I Wayan Nuka Lantara, 2010. "Bank-firm relationship and the use of derivatives in japan," Discussion Papers 2010-58, Kobe University, Graduate School of Business Administration.
    8. 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.
    9. 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.
    10. Atsushi Takao & I Wayan Nuka Lantara, 2009. "The Determinants Of The Use Of Derivatives In Japanese Insurance Companies," Discussion Papers 2009-38, Kobe University, Graduate School of Business Administration.
    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. 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.
    13. 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.
    14. 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.
    15. 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.
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