Showing papers by "Söhnke M. Bartram published in 2006"
TL;DR: In this paper, the authors show that traditional tests of these explanations result in little explanatory power for determining which firms use derivatives, and that risk management choices are determined endogenously with other financial and operating decisions in ways that are intuitive but difficult to attribute to specific theories.
Abstract: Popular theories of financial risk management indicate that nonfinancial corporations may use derivatives to lower the expected costs of financial distress, to coordinate cash flows with investment policy, or because of agency conflicts between managers and owners. Using a new database of 7,319 firms in 50 countries, we show that traditional tests of these explanations result in little explanatory power for determining which firms use derivatives. Instead, risk management choices are determined endogenously with other financial and operating decisions in ways that are intuitive but difficult to attribute to specific theories. This finding has several important implications. First, it explains why identifying specific motivations for financial risk management is difficult. Second, it indicates that derivative usage can have significant effects on other firm decisions such as the level and maturity of debt, dividend policy, holdings of liquid assets, and the degree of operating hedging. Third, it implies that future empirical and theoretical research on corporate risk management needs to examine a broader array of firm characteristics and decisions to better isolate the role derivatives play in financial policy.
387 citations
TL;DR: In this paper, the Euro's launch was associated with an increase in total stock return volatility, and significant reductions in market risk exposures arose for nonfinancial firms both in and outside of Europe.
132 citations
TL;DR: In this paper, the authors investigated the motivations and practice of non-financial firms with regard to using options in their risk management activities and found that a significant number of 15% to 25% of the firms outside the financial sector use options.
Abstract: Purpose – This paper investigates the motivations and practice of nonfinancial firms with regard to using options in their risk management activities.Design/methodology/approach – The paper provides a comprehensive account of the existing empirical evidence and analyzes data on the use of derivatives in general and options in particular by nonfinancial corporations across different underlyings and countries.Findings – Overall, a significant number of 15‐25 per cent of the firms outside the financial sector use options. This reflects the fact that options are very versatile risk management instruments that can be used to hedge various types of exposures, linear as well as nonlinear. In particular, options are a useful component of corporate risk management if exposures are uncertain, e.g. due to price and quantity risk. Depending on the correlation between price and quantity risk, the optimal hedge portfolio consists of a varying combination of linear and nonlinear risk management instruments. Moreover, th...
21 citations
TL;DR: In this paper, the authors investigated the information environment during and after a corporate break-up utilizing direct measures of information asymmetry developed in the market microstructure literature and found that information asymmetric declines significantly as a result of a breakup, but this reduction takes place not at the time of its announcement or its completion, but after it has been fully consummated.
Abstract: This paper investigates the information environment during and after a corporate break-up utilizing direct measures of information asymmetry developed in the market microstructure literature. The analysis is based on all corporate break-ups in the United States in the period 1995-2005. The results document that information asymmetry declines significantly as a result of a break-up. However, this reduction takes place not at the time of its announcement or its completion, but after it has been fully consummated. At the same time, not all investors are equally affected, but informed investors who generate private information by skilled analysis of public information come to play a more important role compared to traditional corporate insiders. This might explain why financial advisors promote break-ups among their corporate clients, as they are likely beneficiaries. The positive stock-market reaction to break-up announcements is significantly related to reductions in insider-related information asymmetry, indicating that the advantage of skilled information analysts does not offset the overall improvement in the information environment due to a break-up.
8 citations
Posted Content•
01 Jan 2006
TL;DR: The authors examined the effect of derivative use on firms' risk measures and value, and found strong evidence that the use of financial derivatives reduces both total risk and systematic risk, but their results were more sensitive to endogeneity and omitted variable concerns.
Abstract: Using a sample of 6,888 non-financial firms from 47 countries, we examine the effect of derivative use on firms’ risk measures and value. We control for endogeneity by matching users and non-users on the basis of their propensity to hedge. We also use a new technique to estimate the effect of omitted variable bias on our inferences. We find strong evidence that the use of financial derivatives reduces both total risk and systematic risk. The effect of derivative use on firm value is positive but weak, and is more sensitive to endogeneity and omitted variable concerns. This increased sensitivity could account for the mixed evidence in the literature on the effect of hedging on firm value.
4 citations
01 Jan 2006
3 citations
TL;DR: In this article, the authors comprehensively examine the cross-sectional determinants of financial risk for a large sample of non-financial corporations in over 40 countries and find that the level of total firm risk depends on many firm-specific operating and financial characteristics.
Abstract: We comprehensively examine the cross-sectional determinants of financial risk for a large sample of non-financial corporations in over 40 countries. The level of total firm risk depends on many firm-specific operating and financial characteristics. Consistent with theoretical models and some prior empirical evidence for U.S. firms, the level and type of assets, as well as profitability characteristics, are significant drivers of total risk. In contrast, most financial characteristics are less important, but surprisingly, dividend policy has the strongest effect on total risk of all factors we consider. We also decompose total risk into market risk and firm-specific risk. Contrary to some theoretical predictions, our results indicate that many similar factors determine each type of risk though not necessarily in equal proportions. However, some factors such as foreign operations and asset liquidity are only significant determinants of market risk. Interestingly, the effects of operating and financial characteristics on firm risk depend on the overall level of economic and financial risk in a firm’s home-country. For example, asset tangibility and the use of interest rate derivatives are only important in countries with high financial risk. Finally, we find that many determinants of total firm risk also have important effects on firm value in the way predicted by theory.
1 citations