What Drives Derivatives: An Indian Perspective

Abhimanyu Sahoo and Seshadev Sahoo
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Abhimanyu Sahoo: Xavier School of Commerce (XSC), Xavier University, Bhubaneswar 752050, India
Seshadev Sahoo: Department of Finance & Accounting, Indian Institute of Management (IIM), Lucknow (UP) 226013, India

JRFM, 2020, vol. 13, issue 6, 1-19

Abstract: This study investigates the determinants for the use of derivatives by firms in the Indian market. Using a sample of 433 firms listed in the National Stock Exchange (NSE) in India for the period 2013–2018, we find that firm size, debt to equity, turnover, price–earnings ratio and the magnitude of international transactions are significant influential drivers responsible for pushing the firm to use derivatives for risk management. The findings also document that the financial distress of the firm, which is one of the important reasons for the use of derivatives in advanced economies, happens to be insignificant when it comes to developing countries like India. Using logistic regression, it is observed that highly levered firms condense the use of derivatives as part of a financial risk management strategy, which contradicts existing literature. All other findings are generally consistent with the theory of derivatives as well as with international evidence.

Keywords: financial derivatives; risk management; financial distress; market capitalisation; interest coverage; international transaction (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2020
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