Derivatives Usage and Firm Value : Evidence from South African Listed Firms

Abstract

Increased globalisation has exposed firms to various risks. In response, firms across the globe have turned to derivatives to hedge their exposure. This study explored the effects of derivatives usage on firm value in South African non-financial listed firms. The research employed a dynamic panel data model estimated with the Generalised Methods of Moments (GMM) on a panel of 150 listed non-financial firms. The estimation technique is robust in controlling for endogeneity, unobserved heterogeneity, autocorrelation and dynamic panel bias. On average, 28 % of the JSE listed non-financial firms use derivatives to manage risk. The results indicate two crucial implications:- there is a significant hedging premium for South African non-financial firms that use derivatives and amongst the derivative users, firms with a greater extent of derivatives usage generate higher firm value.