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

Jeffrey(Jun) Chen () and Yun(Yuang) Guan ()
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Jeffrey(Jun) Chen: College of Business, North Dakota State University, USA
Yun(Yuang) Guan: College of Business, Clemson University, USA

Review of Economics & Finance, 2018, vol. 13, 14-28

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.

Keywords: Corporate hedging; Governance; Bondholder rights; Stockholder rights (search for similar items in EconPapers)
JEL-codes: G30 G32 G34 (search for similar items in EconPapers)
Date: 2018
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