The Effect of Derivatives Usage on Value and Risk
: Evidence from European Non-Financial Firms

Student thesis: Doctoral ThesisDoctor of Philosophy


In light of the recent efforts to regulate derivatives markets in response to the 2008/09 Global Financial Crisis, this thesis aims to provide comprehensive new evidence on the spread and effect of derivatives usage on firm value and risk by utilising data from non-financial firms listed in 16 European countries. Although there exists a sizeable body of evidence on the determinants of hedging decisions and how they relate to firm value, the literature has not provided clarity on either matter. In addition, the extant literature that has examined the effect of derivatives usage on firm risk has also provided contradictory evidence. Data from a comprehensive sample of non-financial European firms were manually collected from the firms’ annual reports for the period 2005–2017. This data set is distinctive and discriminated between users of foreign exchange and interest rate derivatives. An analysis of the data revealed that derivatives usage was concentrated in larger-sized firms, providing support for the economies of scale theory. In line with the exposure rationale of using derivatives, movements in derivatives usage positions were related to changes in financial exposure levels. In addition, derivatives usage by European non-financial firms was an effective risk management practice that provided risk reduction. Thus, the results obtained from the current analysis do not support the irrelevance theorem of Modigliani and Miller (1958) but supported corporate risk management theories by verifying risk reduction for derivatives users. However, the results revealed that foreign exchange derivatives users enjoyed a hedging premium, while interest rate derivatives users suffered a hedging discount. Additionally, the findings revealed that the efficiency of derivatives usage was related to country-level differences. Specifically, countries with stronger legal rights, higher development and/or higher international trade were more efficient in their use of derivatives as it led to enhanced value and/or risk reduction. Understanding the impact of derivatives usage on firm value and risk, as well as the country-specific factors relating to their efficiency can improve the ability of corporate managers in employing the most effective risk management strategy, guide risk-averse shareholders to invest in firms holding foreign exchange derivatives and located in larger economies and restrain employees, suppliers and creditors from contracting with firms holding interest rate derivatives with weaker legal rights. Regulatory agencies should formulate rules that distinguish between foreign exchange and interest rate derivatives trades, may ruling restrictions for trading interest rate derivative instruments. Furthermore, policymakers may impose tougher restrictions on, or higher transaction costs for, the use of derivatives in larger economies and set stronger legal rights to limit speculative practices and the severity of economic downturns.
Date of Award2023
Original languageEnglish
SponsorsYarmouk University
SupervisorSuzanne Fifield (Supervisor) & Stavros Kourtzidis (Supervisor)


  • derivatives
  • Europe
  • risk management
  • non-financial firms
  • firm value
  • firm risk
  • financial crisis
  • hedging
  • country-level differences

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