Are Financial Derivates Really Value Enhancing? Australian Evidence

Hoa Nguyen () and Robert William Faff
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Hoa Nguyen: Deakin University, http://www.deakin.edu.au/buslaw/aef/staff/profiles/nguyenh.php

No 2007_14, Accounting, Finance, Financial Planning and Insurance Series from Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance

Abstract: This paper investigates the relationship between the use of financial derivatives and firm value in the Australian setting. Contrary to expectations, we find that the use of derivatives in general, and the use of interest rate derivatives in particular, are negatively related to firm value (as proxied by Tobin’s Q). The existence of this derivative user ‘discount’, combined with strong prior evidence that corporations are primarily motivated by value-enhancing goals, suggests a need for managers to focus serious efforts into explaining their value-driven strategies to the financial market and to do so in a timely manner.

Date: 2007-08-24
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