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Are Corporations Reducing or Taking Risks with Derivatives?

Published online by Cambridge University Press:  06 April 2009

Ludger Hentschel  and
S. P. Kothari
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Abstract

Public discussion about corporate use of derivatives focuses on whether firms use derivatives to reduce or increase firm risk. In contrast, empirical academic studies of corporate dervatives use take it for granted that firms hedge with derivatives. Using data from financial statements of 425 large U.S. corporations, we investigate whether firms systematically reduce or increase their riskiness with derivatives. We find that many firms manage their exposures with large derivatives positions. Nonetheless, compared to firms that do not use financial derivatives, firms that use derivatives display few, if any, measurable differences in risk that are associated with the use of derivatives.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 36 , Issue 1 , March 2001 , pp. 93 - 118
Copyright
Copyright © School of Business Administration, University of Washington 2001

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Footnotes

*

Simon Graduate School of Business Administration, University of Rochester, Rochester, NY 14627; and Sloan School of Management, Massachusetts Institute of Technology, Cambridge, MA 02142, respectively. We thank Jeffref Pontiff (associate editor and referee), Paul Gompers, Stacey Kole, John Long, Bill Schwert, Jay Shanken, Cliff Smith, and seminar participants at the Berkeley Program in Finance, the CEPR Summer Symposium in Finance, the Chicago Board of Trade, the INQUIRE Conference, and the London School of Economics for helpful comments. Anjali Arora and Eric Kim (under an Olin Fellowship) provided excellent research assistance. We gratefully acknowledge financial support from the Bradley Policy Research Center and the John M. Olin Foundation.

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