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The Effects of Derivatives on Firm Risk and Value

Author

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  • Bartram, Söhnke M.
  • Brown, Gregory W.
  • Conrad, Jennifer

Abstract

Using a sample of 6,888 non-financial firms from 47 countries, we examine the effect of derivative use on firms’ risk measures and value. We control for endogeneity by matching users and non-users on the basis of their propensity to hedge. We also use a new technique to estimate the effect of omitted variable bias on our inferences. We find strong evidence that the use of financial derivatives reduces both total risk and systematic risk. The effect of derivative use on firm value is positive but weak, and is more sensitive to endogeneity and omitted variable concerns. This increased sensitivity could account for the mixed evidence in the literature on the effect of hedging on firm value.

Suggested Citation

  • Bartram, Söhnke M. & Brown, Gregory W. & Conrad, Jennifer, 2006. "The Effects of Derivatives on Firm Risk and Value," MPRA Paper 9831, University Library of Munich, Germany, revised 24 Jul 2008.
  • Handle: RePEc:pra:mprapa:9831
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    References listed on IDEAS

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    More about this item

    Keywords

    Derivatives; risk management; hedging; international finance;

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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