Derivatives, Firm Risk And Firm Value

With the drastically fluctuating of the global commodity prices, interest rates and exchange rates, it brought hedging motivation and demand for enterprises. As an important tool of the corporate risk management, derivatives are used to manage and hedge business and financial risk. It's widely used by 94 percents of the world 500 strongest enterprises, thus form its formidable core competitive ability. More and more of our enterprises participate in the usage of the derivatives. However, our enterprises, especially the listed companies which invested in the derivatives, appeared to have a great loss recently. And it reveals the imperfection of derivative-usage for risk management.In this background, this paper researched the theories and demonstrations about the influences of derivatives usage on firm risk and firm value for China listed companies. On the base of study the relevant literature home and abroad, first of all, this paper analyzed the theories about financial derivatives and corporate risk management. Meantime, it reviewed the most theories and demonstrations about the impact of derivatives usage on firm risk and firm value. Furthermore, it analyzed the existing circumstances and features of the global derivatives market, and compared the derivative-usage between different countries and districts. Then it summarized the current situation and characteristics about the derivative-usage of China enterprises especially the listed companies.On this basis, we start from the two samples to develop the empirical study about the effects of derivatives usage on firm risk and firm value. One of the samples of the empirical study is the panel data of listed companies in Shanghai and Shenzhen stock markets which use derivatives or not (a total of 585) all in 2007 and 2008. From the view of transverse comparisons, the article studied the effects of derivative use or not on firm risk and firm value. The other is the panel data of listed companies in the first sample which have used derivatives in 2007 and 2008 but not in 2005 and 2006(a total of 22). From the view of longitudinal comparisons, the article studied the influences of ante-usage or post-usage about derivatives on firm risk and firm value. Using the regression analysis of Panel Data, as measured firm risk by the company's annual beta and the standard deviation of daily stock returns, and measured firm value by Tobin's Q respectively, the following conclusions could be drawn:Firstly, from the view of transverse comparisons, as compared to the derivative non-users of companies, corporate use of derivatives will increase its systemic risk and volatility of its stock returns for the derivative users. However, from the view of longitudinal comparisons, after used the derivatives, the firm's systemic risk is not higher than before. Instead, it will reduce the firm's systemic risk weakly. But after used the derivatives, the volatility of stock returns will still increase.Secondly, from the view of transverse comparisons, as compared to the derivative non-users of companies, the impact of derivative usage on firm value is not significant for the derivative users. However, using ROA and ROE as proxies for corporate performance, it proved that the use of derivatives can positively affect our listed companies'operating performance. Moreover, from the view of longitudinal comparisons, for the companies which have ever used derivatives, the firm value of the company that after use of derivatives is higher than before.Finally, on account of the actual situation in our country, the thesis put forward some suggestions about the development of China derivatives markets and improvement of the use of derivatives for corporate risk management, from the government level and corporate level respectively.