Why Firms Use Derivatives: Evidence from New Zealand

28 Pages Posted: 25 Aug 2010

See all articles by Klaus Buhr

Klaus Buhr

Massey University - School of Economics and Finance; UNITEC Institute of Technology

Date Written: January 23, 2010

Abstract

The objective of this paper was to find the underlying motives for using foreign exchange derivatives by non-financial companies listed on the New Zealand stock exchange and to identify which existing theories of derivatives are the most appropriate for the New Zealand corporate sector. We used logistic regression, Pearson correlation and univariate analysis methods to test four different hedging theories – foreign risk theory, scale economies, underinvestment theory and theory of financial distress. Support is found for scale economies theory – larger firms are more likely to hedge with foreign currency derivatives. This can be explained by financial constraints which small and start-up companies may face. We also find that larger firms use hedging for speculation purposes if shareholders consider it a profit-making activity. The results provide no support for any of the other three tested theories – the proportion of foreign sales, leverage, capital expenses and R&D expenses appear to be weak incentives to use foreign exchange derivatives.

Keywords: Hedging

JEL Classification: J23

Suggested Citation

Buhr, Klaus, Why Firms Use Derivatives: Evidence from New Zealand (January 23, 2010). 23rd Australasian Finance and Banking Conference 2010 Paper, Available at SSRN: https://ssrn.com/abstract=1663526 or http://dx.doi.org/10.2139/ssrn.1663526

Klaus Buhr (Contact Author)

Massey University - School of Economics and Finance ( email )

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UNITEC Institute of Technology ( email )

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