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On the determinants of derivative usage by Australian companies

journal contribution
posted on 2002-06-01, 00:00 authored by Hoa NguyenHoa Nguyen, R Faff
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.

History

Journal

Australian journal of management

Volume

27

Issue

1

Pagination

1 - 24

Publisher

Australian Graduate School of Management

Location

Kensington, N.S.W.

ISSN

0312-8962

eISSN

1327-2020

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal

Copyright notice

2002, Australian Graduate School of Management

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