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Determinants of Financial Derivative Usage: Empirical Evidence from the Perspective of Governance Structure

Author

Listed:
  • Jeffrey(Jun) Chen

    (College of Business, North Dakota State University, USA)

  • Yun(Yuang) Guan

    (College of Business, Clemson University, USA)

Abstract

By examining the use of derivatives in a sample of US firms, this paper studies the relationship between the structure of corporate governance, including both bondholder rights and shareholder rights, and managerial hedging decision. We detect a significant association between the hedging decision and governance structure after controlling for well-documented rationales in the prior literature. As one of the first papers, we recognize the impact of bondholder rights on risk management. Our results document both strong bondholder rights and strong shareholder rights encourage hedging strategy, which supports our hypothesis that the main role of corporate hedging is to overcome inefficient markets and maximize firm value, and therefore strong bondholder (or shareholder) rights are positively related to the hedging policy. Our main results keep robust after adopting multiple alternative measures of bondholder rights and shareholder rights and using simultaneous equations model (SEM) to control for potential endogeneity. Moreover, we find weakly significant results echoing earnings management hypothesis but no evidence of risk-shifting hypothesis is observed.

Suggested Citation

  • Jeffrey(Jun) Chen & Yun(Yuang) Guan, 2018. "Determinants of Financial Derivative Usage: Empirical Evidence from the Perspective of Governance Structure," Review of Economics & Finance, Better Advances Press, Canada, vol. 13, pages 14-28, August.
    • Handle: RePEc:bap:journl:180302
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    References listed on IDEAS

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    More about this item

    Keywords

    Corporate hedging; Governance; Bondholder rights; Stockholder rights;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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