The Determinants of Derivatives Use: Evidence from Non-Financial Firms in Taiwan

Pei-Gi Shu () and Hsuan-Chi Chen ()
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Pei-Gi Shu: Department of Business Administration, Fu-Jen Catholic University, Taipei Hsien, Taiwan, R.O.C.
Hsuan-Chi Chen: Department of Finance, Yuan Ze University, Taoyuan, Taiwan, R.O.C.

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2003, vol. 06, issue 04, 473-500

Abstract: This paper examines the major determinants of a firm's derivatives use for companies listed in Taiwan Stock Exchange in the period from 1997 to 1999. The study finds that the proportion of derivatives use in Taiwan, ranging from 31% to 37%, is comparable to that of the US (35%), but less than that of New Zealand (53%). Firms' derivatives use in Taiwan asymmetrically focuses on currency/forwards derivatives. Industry breakdown illustrates that the electronic industry stands for the heavy user both in terms of number and amount. We show that the vital determinants of a firm's derivatives use are size, the ratio of long-term debt to total debt, the electronic industry dummy, and the export ratio. The fact that firms' derivatives use positively correlated with size and the long-term-debt-to-total-debt ratio implies thecapability-willingnesshypothesis: only large firms are affordable to engage in derivatives use due to the concern of economies of scale in establishing and maintaining expertise, and these firms demand more derivatives use when they face with high financial risk in debt structure.

Keywords: Derivatives use; size; export; hedging (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (7)

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DOI: 10.1142/S0219091503001171

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