An Empirical Study On The Relationship Between The Usage Of Derivatives In Chinese Enterprises And Firm Performance

Since the United States created the world's first successful futures market in 1972, the financial derivatives have been developing rapidly, foreign exchange, interest rate and commodity derivatives having been created to meet the urgent requirements of risk aversion for institutional and individual investors. Faced with an increasingly turbulent international financial situation, foreign companies have turned to use derivatives for risk management. As for the volatility of raw materials and product price in international market, Chinese enterprises also need the derivatives to hedge these risks. But in fact, it is still in the initial stage that domestic firms use derivatives such as futures, options and swaps for risk management, and the actual operation and management experience are also premature. Hence, it has become the industry's focus of attention on how to use financial derivatives to hedge market risks, thus improving firm performance. Therefore, research on enterprises using derivatives for risk management, as well as the relationship between derivative use and corporate performance has been of important theoretical value and practical significance.Under this background, this paper not only makes an analysis theoretically, but also selects 27 listed companies in non-ferrous metals industry between 2003 and 2009 as research targets, takes the panel data models for empirical analysis, and makes a comprehensive and systematic analysis on the relationship between corporate using derivatives and corporate performance.The core question in this paper is to study whether the enterprises' usage of financial derivatives will impact firm performance. It combines theoretical analysis with empirical research, and describes the usage on financial derivatives situation from qualitative and quantitative respects in and aboard. This paper starts with the general principles, and elaborates risk management theory on derivatives in western countries formed through more than 30 years; then, it inspects the data with stationary test and co-integration test, and takes three kinds of model checking methods---the co-change analysis, LM test and Hausman test, to determine the forms of panel data models; finally, it tests the relationship between companies using derivatives and corporate performance empirically and analyzes the reasons.The empirical results show that:enterprises using derivatives will not affect the firm performance, that is to say, firm value and performance are not impacted by whether to use derivatives or not. However, foreign theories on enterprises using derivatives explain that:the usage of derivatives in enterprises can increase the company' performances by reducing the expected revenue, lowering costs of financial difficulties as well as avoiding the lack of investment opportunities, which have also been affirmed in many empirical studies. Thus, the result of this paper is inconsistent with the foreign mainstream theoretical and empirical results. To a large extent, this is because, in China's enterprises, the negative impact on using derivatives has offset its positive effects. The reasons are:on the one hand, there are few companies to use derivatives, distribution of usage between industries too concentrated, and the single structure of used derivatives; most enterprises lack the actual operation and management experience, and form a serious blindness to follow suit even speculate; even some enterprises carry on the transactions privately aboard, but the results are unknown. On the other hand, in our country, the development of derivatives market is low, the related disclosure rules are of many defects, and the relevant laws and regulations are not perfect and not have enough role of intensive supervision; moreover, international investment banks conceal and fraud the enterprises in the actual trade process, which also causes the relationship between the usage of derivatives and firm performance weak in our enterprises.The usage of derivatives for risk management is the irreversible trend; it can effectively improve enterprises' management capabilities and competitiveness. Therefore, from the point of companies, it is necessary for Chinese's enterprises to correct the attitude of using derivatives and remember that the purpose of derivatives is to guard against the risk but not to create risk, to form the sound internal control mechanism and regulate the practical operation process, and to build the training, incentive and protection mechanisms on the professionals who know the derivatives well. From the national perspective, relevant agencies should strengthen the institutional development on derivatives market and progress the development of the domestic derivatives market steadily, formulate relevant laws and regulations to regulate the conduct of market and enterprises, and take the norms and innovation for regulations seriously.