Derivatives, Firm Risk And Firm Value

With the drastically fluctuating of the global commodity prices, interest rates and exchange rates, it brought about strong hedging motivation and demand for enterprises. Because of the derive tools' inherent characters that are leverage effect and low transaction cost, which can be used to hedge risk, the using of derivatives in enterprises all over the world has been increasing rapidly in the past several years. After1980's, the explosive development of derive tools made derivatives hedging become the important tools of allocating modern financial market risk. With the globalization of world economy and the internationalization of our country's economy, as well as the world' reproduction process, economic volatility and fluctuations in the price of risk are also becoming globalization and synchronization. What's more, accompanied by the accession to WTO in November2001, Chinese enterprises began to face more risk of fluctuations of the raw materials and products in the international financial markets, which made Chinese enterprises pay much more attention to using derivatives to manage risk. In this background, this paper researched the theoretical analysis and empirical demonstrations about the impact of derivatives'usage on firm risk and firm value for China listed companies. On the base of studying the relevant literature, this paper firstly analyzed the connotation of derivatives. Secondly, it reviewed the most theories and demonstrations about the enterprises'motivations to use derivatives, and its impact of derivatives usage on firm risk and firm value.It took more than3months to manually select about2000of the Shanghai and Shenzhen A-share listed companies'data from2007-2010annual reports, semiannual reports and public information from Sina finance website for the study sample. There were110companies who used the derivatives, and93companies who launched futures hedging activities. Firstly, this paper researched enterprises'motivations to use derivatives. Secondly, by using the company's annual beta and the standard deviation of daily stock returns and the Z-Score bankruptcy risk to measure firm risk, using Tobin's Q to measure the firm value respectively, and by using the regression analysis of Panel Data model, this paper researched the influence of derivatives'usage on firm risk and firm value. The main conclusions of this study were:(1) enterprises which had larger size and higher financial distress cost tended to use derivatives;(2) compared to the companies which hadn't use derivatives, derivative users significantly increased their systemic risk, while the volatility of stock returns and bankruptcy risk were not significantly;(3) the companies which used derivatives failed to enhance corporate value. Maybe this was because the domestic derivatives market was less developed. What's worse, most enterprises haven't have a well understanding of market's risk aversion, and risk management is not in place, or speculative incorrectly for the sake of profit, which all made enterprises suffered unnecessary loss. Finally, this paper proposed some suggestions about the way to develop China's derivatives market and to improve our enterprises'derivative-usage ability from the macro level and micro level.