The Choices And Consequences Of Hedging By Derivatives

Financial derivatives has been existed as a risk management tool since its inception. Before1972, it has always been to play a supporting role, failed to become the protagonist of risk management. Accompanied by the collapse of the Bretton Woods system, the fixed exchange rate system of "the U.S. dollors, gold hook"no longer exist, Financial institutions, businesses and individuals encountered turmoil and uncertainty unprecedented in the history of the world’s finance. Huge changes in the areas of risk make the rapid development of derivatives, it has been put on the front of the risk management, become the important risk management tool. Because of the "Double-edged sword" nature, it has always been controversial. Economists review that derivatives is the most controversial financial innovation in the20th century, especially after the financial crisis in2008, financial derivatives was in a legal limbo.Accounting academics launched more study from the perspective of fair value measurements, but there were few studies relatively for the impact of financial derivatives on corporate finance. Finance scholars has been committed to the study of influencing factors of corporate value, many studies are based on the ownership structure, the level of investment, management compensation and growth opportunities, but less study of the impact of financial derivatives hedging on enterprise value exist. This paper will study the impact of financial derivatives on corporate finance by Chinese listed companies.First of all, consider the complexity of financial derivatives, this paper made a brief description of its connotation, types and features in the introduction. Then we reviewed the related literature as the basis of the present theory and empirical analysis. What’s more, we analyzed the status of financial derivatives hedging use by Chinese listed companies, and selected listed companies of Chinese nonferrous metal industry as the empirical sample. In this paper, we analyzed two problems: the motivation of financial derivatives hedging use, and the impact of hedging by derivatives on corporate value. Finally, according to the status analysis and empirical research results, we made policy recommendations and later research prospects.This paper is expected to restore the confidence of those enterprises participate in derivatives trading which was lost in financial crisis, and to provide a new risk management tool for those enterprises with no derivatives trading ever before, to provide reference for the financial decisions.From the results of literature review, most western theory and empirical research supported that the use of financial derivatives enhance the corporate value, these theories consider that corporate value is enhanced through financial derivatives because of tax expenditures, costs of financial distress, insufficient investment, costs of external financing and cost of bankruptcy. Minority literatures consider that the use of financial derivatives reduce the enterprise value, the main theoretical basis is self-interest theory of managers. Before the introduction of Chinese new accounting standards in2006, derivatives-related data is difficult acquired, there were only a little empirical research, most of the literature are analysis and synthesis of the foreign theory.Through the situation analysis of Chinese listed companies use financial derivatives hedging, we found that Chinese enterprises use smaller financial derivatives, less variety and less efficient..Another way, good development trend of the domestic derivatives market determines Chinese enterprises will be more involved in derivatives trading. Therefore, the study of financial derivatives is necessary. According to the current situation of Chinese enterprises to use dinancial derivatives, nonferrous metals industry in metal and nonmetal industry use the most financial derivatives in our country, and it also use derivatives more mature than other industries. So, we selected listed companies of Chinese nonferrous metals industry as the empirical sample.The empirical study is divided into two parts:(1)the motivation of financial derivatives hedging use. Five assumptions bases of the results of previous theoretical and empirical research were proposed. We suggested that the motivation is asset size, asset-liability ratio, price-earnings ratio, the proportion of fixed assets, the proportion of managerial ownership, interest coverage ratio. We constructed a logistic multiple regression model, use the stata professional statistical analysis software to make descriptive statistical analysis and regression analysis.(2)The impact of hedging by derivatives on corporate value. Two assumptions bases of the results of previous theoretical and empirical research were proposed, we suggested that Chinese enterprises to use financial derivatives hedging can enhance corporate value, and use larger financial derivatives, the higher the enterprise value is. We build OLS multiple regression models; use the stata professional statistical analysis software to make descriptive statistical analysis and regression analysis.Empirical results show that:(1)Asset size, asset-liability ratio with corporate hedging behavior has a significant positive correlation, but the effective tax rate, interest coverage ratio, price-earnings ratio, the proportion of fixed assets and the proportion of managerial ownership has no significant correlation with corporate hedging behavior.(2)Use of financial derivatives hedging is positively correlated with corporate value, and the scale of financial derivatives is positively correlated with corporate value.We suggested the relevant policy recommendations from two angles:1.From the perspective of market regulation, Suggested that the relevant departments to resolve the contradiction between regulation and innovation to provide more hedging instruments for Chinese enterprises; Recommended that regulatory agencies clear division of labor and strengthen coordination to play its unique effectiveness; Proposed to improve the legal system of financial derivatives to support the healthy and rapid development of Chinese financial derivatives, Recommend enterprises to strengthen the understanding of financial derivatives, use of financial derivatives rationally; Proposed to improve the company’s internal control system;Proposed to train and introduce more financial derivatives expertise.Through the analysis of the limitations of this paper, we suggest the main research direction of the later scholars is:(1)with the improvement of laws and regulations, obtain more detailed data from the financial reports of listed companies, Expand a more detailed study;(2)with the gradual maturity of the domestic derivatives market. Use more comprehensive sample to expand the relevant empirical research.