On the determinants of derivative usage by Australian companies

Nguyen, Hoa and Faff, Robert 2002, On the determinants of derivative usage by Australian companies, Australian journal of management, vol. 27, no. 1, pp. 1-24.

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Title On the determinants of derivative usage by Australian companies
Author(s) Nguyen, Hoa
Faff, Robert
Journal name Australian journal of management
Volume number 27
Issue number 1
Start page 1
End page 24
Publisher Australian Graduate School of Management
Place of publication Kensington, N.S.W.
Publication date 2002-06
ISSN 0312-8962
1327-2020
Keyword(s) derivative usage
firm value
hedging
risk management
Summary This paper provides an examination of the determinants of derivative use by Australian corporations. We analysed the characteristics of a sample of 469 firm/year observations drawn from the largest Australian publicly listed companies in 1999 and 2000 to address two issues: the decision to use financial derivatives and the extent to which they are used. Logit analysis suggests that a firm's leverage (distress proxy), size (financial distress and setup costs) and liquidity (financial constraints proxy) are important factors associated with the decision to use derivatives. These findings support the financial distress hypothesis while the evidence on the underinvestment hypothesis is mixed. Additionally, setup costs appear to be important, as larger firms are more likely to use derivatives. Tobit results, on the other hand, show that once the decision to use derivatives has been made, a firm uses more derivatives as its leverage increases and as it pays out more dividends (hedging substitute proxy). The overall results indicate that Australian companies use derivatives with a view to enhancing the firms' value rather than to maximizing managerial wealth. In particular, corporations' derivative policies are mostly concerned with reducing the expected cost of financial distress and managing cash flows. Our inability to identify managerial influences behind the derivative decision suggests a competitive Australian managerial labor market.
Language eng
Field of Research 150201 Finance
HERDC Research category C1.1 Refereed article in a scholarly journal
Copyright notice ©2002, Australian Graduate School of Management
Persistent URL http://hdl.handle.net/10536/DRO/DU:30004330

Document type: Journal Article
Collection: School of Accounting, Economics and Finance
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