Motivations for derivatives usage among New Zealand firms
Theoretical research argues that using derivative instruments for risk management can add value to a firm if there are capital market imperfections such as costs associated with financial distress, progressivity in tax rates, and conflicts of interest between the fixed claimholders and the shareholders.For comparison this study repeats Berkman and Bradbury’s (1996) research to provide non-survey evidence on the use of derivative financial instruments from the 1999 audited financial reports of 117 New Zealand firms. Three models are used to analyse derivative use. The first two models use a Tobit regression model with the fair and contract values scaled by the market value of the firm to measure the extent of derivative use. Due to possible misclassification of derivative and non-derivative users, the third model uses a binary dependent variable to represent if a firm is a user or non-user of derivatives. Support is found for some of the theoretical models of derivative use for risk management. However, these results are sensitive to the way in which the derivative user is classified.
Keywords: derivative instruments; risk management; capital market imperfections,