Journal article
Does derivative usage boost firm value in an economy with controls? Evidence from India
- Abstract:
- The role of derivatives on firm valuation has recently become a subject of intense debate for emerging markets where there is greater asset price volatility, illiquidity, and the absence of common regulations and accounting standards. Given the lack of data availability, disclosure inconsistency and distinctive regulatory requirements for Indian firms, we assess the impact of corporate hedging via derivative use on the performance of BSE-100 non-financial firms over the period 2010–2017. Our results from keywords-based hand-collected derivative usage data show that all types of derivatives, except rate derivatives, have a significant and positive impact on firm value through channels of reduced earnings volatility and increased leverage with tax benefits. Firms with greater leverage tend to benefit from the use of rate derivatives. Still, among those highly leveraged firms, the ones who experience high earnings volatility are unable to benefit from rate derivatives. Besides, hedge accounting benefits firms in dealing with earnings volatility when they have higher derivatives exposure. As capital controls on international flows can limit the use of derivatives, we show that firms with currency risk exposure in terms of long-term foreign currency debt do benefit from rate derivatives. Our results are also robust with a matched sample for derivative users and non-users. Overall, we conclude that easing regulatory controls on derivatives dealings can be beneficial for firms in growing emerging economies.
- Publication status:
- Published
- Peer review status:
- Peer reviewed
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(Preview, Version of record, pdf, 1.4MB, Terms of use)
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- Publisher copy:
- 10.1007/s11156-024-01290-4
Authors
- Publisher:
- Springer
- Journal:
- Review of Quantitative Finance and Accounting More from this journal
- Publication date:
- 2024-05-16
- Acceptance date:
- 2024-04-27
- DOI:
- EISSN:
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1573-7179
- ISSN:
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0924-865X
- Language:
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English
- Keywords:
- Pubs id:
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1995913
- Local pid:
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pubs:1995913
- Deposit date:
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2024-05-13
Terms of use
- Copyright holder:
- Gupta et al.
- Copyright date:
- 2024
- Rights statement:
- © The Author(s) 2024. Open Access. This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.
- Licence:
- CC Attribution (CC BY)
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