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The Determinants of Derivatives Use: Evidence from Non-Financial Firms in Taiwan

Author

Listed:
  • Pei-Gi Shu

    (Department of Business Administration, Fu-Jen Catholic University, Taipei Hsien, Taiwan, R.O.C.)

  • Hsuan-Chi Chen

    (Department of Finance, Yuan Ze University, Taoyuan, Taiwan, R.O.C.)

Abstract

This paper examines the major determinants of a firm's derivatives use for companies listed in Taiwan Stock Exchange in the period from 1997 to 1999. The study finds that the proportion of derivatives use in Taiwan, ranging from 31% to 37%, is comparable to that of the US (35%), but less than that of New Zealand (53%). Firms' derivatives use in Taiwan asymmetrically focuses on currency/forwards derivatives. Industry breakdown illustrates that the electronic industry stands for the heavy user both in terms of number and amount. We show that the vital determinants of a firm's derivatives use are size, the ratio of long-term debt to total debt, the electronic industry dummy, and the export ratio. The fact that firms' derivatives use positively correlated with size and the long-term-debt-to-total-debt ratio implies thecapability-willingnesshypothesis: only large firms are affordable to engage in derivatives use due to the concern of economies of scale in establishing and maintaining expertise, and these firms demand more derivatives use when they face with high financial risk in debt structure.

Suggested Citation

  • Pei-Gi Shu & Hsuan-Chi Chen, 2003. "The Determinants of Derivatives Use: Evidence from Non-Financial Firms in Taiwan," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 6(04), pages 473-500.
    • Handle: RePEc:wsi:rpbfmp:v:06:y:2003:i:04:n:s0219091503001171
    DOI: 10.1142/S0219091503001171
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    References listed on IDEAS

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    1. Anne E. Peck, 1985. "Futures Markets: Their Economic Role," Books, American Enterprise Institute, number 968570, September.
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    Cited by:

    1. B. Charumathi & Hima Bindu Kota, 2012. "On the Determinants of Derivative Usage by Large Indian Non-financial Firms," Global Business Review, International Management Institute, vol. 13(2), pages 251-267, June.
    2. Abhimanyu Sahoo & Seshadev Sahoo, 2020. "What Drives Derivatives: An Indian Perspective," JRFM, MDPI, vol. 13(6), pages 1-19, June.
    3. Arnold, Matthias M. & Rathgeber, Andreas W. & Stöckl, Stefan, 2014. "Determinants of corporate hedging: A (statistical) meta-analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(4), pages 443-458.
    4. Franziska Wolf & Terry Boulter & Sukanto Bhattacharya, 2017. "Derivative Practices in Australian and Canadian Industries," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 20(04), pages 1-39, December.
    5. I Wayan Nuka Lantara, 2012. "The Use of Derivatives as a Risk Management Instrument: Evidence from Indonesian Non-Financial Firms," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 11(1), pages 45-62, June.
    6. Ching-Lung Chen & Hung-Shu Fan & Ya-Ming Yang, 2014. "The effects of corporate governance and accounting rule changes on derivatives usage," Review of Derivatives Research, Springer, vol. 17(3), pages 323-353, October.

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    More about this item

    Keywords

    Derivatives use; size; export; hedging;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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