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Further evidence on the corporate use of derivatives in Australia : the case of foreign currency and interest rate instruments

journal contribution
posted on 2003-12-01, 00:00 authored by Hoa NguyenHoa Nguyen, R Faff
In a recent issue of this journal Nguyen and Faff (2002) reported on an empirical exploration of the motives behind the aggregate use of financial derivatives by Australian companies. Employing the same sample of firms, the current paper extends their analysis to investigate similar issues, this time focussing separately on foreign currency and interest rate derivatives. At a specific level, our results reveal the following. A firm is more likely to use foreign currency derivatives if it is large and has more debt in its capital structure. Interest rate derivatives, on the other hand, are more likely to be used if a firm is larger, more levered, more liquid and pays higher dividends. These results are consistent with existing hedging theories. Market to book value (proxying growth opportunities), however, portrays an inconsistent relationship with the likelihood of interest rate derivative usage. When it comes to the extent of usage, a firm uses foreign currency derivatives more extensively if it is smaller, pays higher dividends and has more debt. Similarly, interest rate derivatives are used more extensively to address a high level of debt and a high dividend payout policy. At a general level, the current study confirms the core finding of Nguyen and Faff (2002), namely, that Australian companies use derivatives with a view to value maximisation.

History

Journal

Australian journal of management

Volume

28

Issue

3

Pagination

307 - 317

Publisher

Australian Graduate School of Management

Location

Randwick, N.S.W.

ISSN

0312-8962

eISSN

1327-2020

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal

Copyright notice

2003, Australian Graduate School of Management

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