The association between financial derivatives and firms' value and performance: evidence from the UK’s financial firms

Al Fazari, Said Ali Mohammed

Abstract

There is a consensus among industry players and academics that the ungoverned use of complex financial derivatives in a high volume of transactions, which very few fully understood, and the lack of transparency underlying the transactions of those complex financial derivatives, played an important role in the occurrence of the 2007 financial crisis. Therefore, it is crucial to investigate how financial firms use financial derivatives that can affect firm value and the performance of the financial industry.
This study attempts to shed more light on how UK financial firms conduct their risk management policies by using financial derivatives for hedging. We use an unbalanced dataset which comprises information on 128 UK financial firms, from the time period between 2005 and 2014. We find that 35.18% of the firms use derivatives and 32.14% use them for hedging purposes only.
We employ the Ordinary Least Squares (OLS) estimator for the Panel Data, which produces consistent and significant results. Our regression results show positive and statistically significant relationships between the use of derivatives for hedging and firm value. Meanwhile, the regression results dealing with Return on Assets (ROA) and Stock Return (SR) suggest that the use of derivatives for foreign exchange rate risk (FX) and interest rate risk (IR) has mixed positive and negative significant impacts on accounting and market performance. Thus, we can conclude that our findings support the notion in the risk management literature that the effect of derivatives usage on firm performance is mixed and ambiguous.

Citation

Al Fazari, S. A. M. (2018). The association between financial derivatives and firms' value and performance: evidence from the UK’s financial firms. (Thesis). University of Hull. Retrieved from https://hull-repository.worktribe.com/output/4321709

• Thesis Type: Thesis
• Deposit Date: Jul 4, 2023
• Publicly Available Date: Jul 4, 2023
• Keywords: Business
• Public URL: https://hull-repository.worktribe.com/output/4321709
• Award Date: Jun 1, 2018