Empirical Study On The Derivatives Usage For Hedging By China's Listed Corporates

Since the collapse of the Bretton Woods system in 1970s and the discharge of regualions Q in 1980s, the exchange rate and interest rates have fluctuated more violent, which accelerates the development of financial derivatives. More and more enterprises began to use financial derivatives to hedge. However, for the characteristics of financial derivatives, such as leverage, complexity and speculativeness, high yield and high risk co-exist in them. If corporates imporperly use or excessively speculate, it will bring huge losses to the corporates.It was reported that 68 state-owned enterprises had lost 11.4 billion before Oct. 2008. However, except the overwhelming huge loss news, there are very few articles to analyze the status and fesibility of corporate use of financial derivatives. It leaves many mysteries to unlock:Do the China's listed corportes use financial derivatives to hedge or speculate? If they use them to hedge, then what risks the corporates want to hedge? What determinants drive the corporates to start the financial derivatives program? And what factors determine the hedging positions? DO the usage of financial derivatives reduce the risk of corportaes or add value?The Ministry of Finance issued the new "Enterprise Accounting Standards" in 2006, which requires China's listed corporates to disclose the usage information of derivatives. We based on the standards and collected a large number of enterprise features to complete the empirical study comprehensively. The main views and conclusions of each chaper are reported as follows:1. The Main Purpose of China's Listed Corporates Using Financial DerivativesAs the research results of most foreign literatures, our statistics find the dominated purpose of China's listed corporate using financial derivatives is hedging. However, the corporates that achieved highly effective hedging only account one-tenth of all corporates using financial derivatives. Moreover, a small number of corporates used wrong derivatives that don't have hedging function, or improperly operated, which had become as speculation in fact.2. The Determinants of HedgingOur Logit model estimation results show:If the corporates has tax preference items, such as tax loss carryforwards or investment tax credits, they will more likely use financial derivatives to hedge; the corporates that have net interest payable or higher fixed assets ratio are more possible to hedge; the corporates which price/earning ratio or price-to-equity are lower are more likely to hedge; executive compensation, managerial ownership share and directors ownership share are significantly positvely correlative with hedging; the greatest share of shareholders, overseas sales and foreign currency loan ratio, floating interest rates, company scale and diversification levels are also significantly positively correlative with hedging. The other important finding is that the proportion of state-owned shares and hedging exist substitution relation.3. Hedging and Corporates Risk.We use the standard deviation of stock returns and annual Beta values to measure the risk and systemic risk. The empirical study in 2007 show the start of derivative program increase the total risk but reduce the systematic, which is consistent with the coordinated risk management theory. However, with the increase of financial deravatives position, the system risk also begin to increase. In addition, in 2008 and 2009, empirical results show that not only the financial derivative dummy variables but also the financial derivative position are positively correlative with total and system risk.4. Hedging and Firm Value.We use Tobin Q and market-to-book ratio as the proxy variables for forporate value. Empirical results show that not only the startup of hedging, but also the increase of hedging positions reduced the corporates value in 2007 and 2008. However, hedging began to show hedging premium in 2009.5. Empirical Study on Speculation.When the sample incorporate speculation corporates, the variable coefficients of financial distress and risk exposure become no longer significan. However, the vairiable coefficients of investment opportunities and corporate scale become more significant. This change show corporates speculate for the reason of making use of investment opportunities and saving the startup or transaction cost of hedging, but not avoiding financial distress or financial price risk.Moreover, when the sample incorporate speculation corporates, the empirical study of financial derivatives usage and corporate risk won't show coordinated risk relation any longer, and the hedging premium disappear in the empirical study of financial derivatives usage and corporate value. Thus, corporates should use financial derivatives to hedge but not speculate.6. The Case Study.We choose the corporates that lost more than 100 million yuan to find the main loss reasons. We found that corporates loss mainly due to:deviating from hedging objectives to reduce production costs or improving business performance; choosing the wrong financial derivatives; improper operation; the defective internal control system; failing to take effective countermeasures for speculation. Therefore, we suggest China's, corporates should use exchange-traded financial derivatives to hedge, establish an effective special internal control system of financial derivatives, improve the level of hedging operations, and be good at use substitution strategies of hedging.My paper achieves some breakthroughs and innovations through systematic study.1. The New Data Sourcs.Since most derivative data decentralize in annual reports of listed corporates, it will take a lot of time to collect them. Nearly all related empirical studies based on the information from the database in China, which made the empirical studies had no complete data and object of study. My paper includes all the corporates that are listed in Shanghai or Shenzhen Stock Exchange and use financial derivatives. This paper is the domestic first one that distinguish the hedging corporates from speculation corporates to study the hedging determinants and effects.2. The Innovation of Study MethodsWe use t test, Wilcoxon rank sum test, Logit Model, Tobit Model and OLS to estimate the determinants and effects of hedging. Moreover, we use simultaneous equation, instrumental variable method, and 2SLS to control endogenity, which ensures the conclusion is effective.3. The Innovation of Study FrameworkThis paper mainly includes four parts:the division of hedging and speculation corporates, the determinants of hedging, the effects of hedging and the case study. These four parts are closely related and the validity of one part is affected by the other parts. The division of hedging and speculation corporates is the basis and logical starting point of the whole study, which quality will affect the conscientiousness of the study; the determinants and effects of hedging may interact; the case study cannot only verify the validity of the division of hedging and speculation, consummate the theoretical hypotheses of hedging determinants, but also is the supplement of empirical study of hedging determinats and effects.