Firm Value and the Use of Financial Derivatives : Evidence from Developed Countries

Firms use derivatives to achieve various stated goals ranging from enhancing risk management, alleviating under-investment, and information asymmetry, reducing the financial distress costs and tax burden, as well as maximizing firm value. Using a sample of 47,191 year-firm observations spanning 7 developed countries and accounting for potential reverse causality, we test whether financial derivatives usage impacts firm value. Empirical evidence shows firms that use derivatives do not see any positive effect on their valuation. When we distinguish the firms adopting derivatives usage from those abandoning their use, we observe an asymmetric effect for some specific countries. For instance, US firms abandoning the use of derivatives experience no significant effect on their valuation while those adopting their use observe a negative impact in terms of the valuation measures employed. Similarly, UK firms showed no significant valuation effect when abandoning the use of derivatives while adopting derivatives, more specifically interest rate instruments, to lower industry adjusted values