Corporate hedging and derivatives usage: a systematic literature review and new empirical evidence from an emerging market
Derivatives usage has attracted a great deal of attention in the corporate hedging literature over the past few decades. The majority of these studies are based on samples from the US or other Western countries. However, although researchers have developed several corporate hedging theories, which are mainly focusing on shareholder value maximization and manager risk aversion perspectives, findings of these studies are mixed and inconclusive. It remains unclear why and how non-financial firms use derivatives in the hedging literature.
This thesis advances corporate hedging and derivatives usage research by comprehensively mapping out the landscape of this field and adding new empirical evidence from an emerging market, in Chapter 2, to develop a framework for further research. Specifically, Chapter 2 utilizes a systematic literature review approach and bibliographic mapping method to analyze the shape and composition of the corporate hedging and derivatives usage literature published between 1981 and 2020. Further bibliographic mapping analysis of the most influential articles and manual assessment of the more recent studies reveal significant themes and important future research trends in this field. This study thus, for the first time, analyzes and visualizes the connections and interactions of studies in the corporate hedging field through a systematic literature review methodology, providing a framework for a deeper understanding of the field.
Chapters 3 and 4 use Chinese market data to extend these research trends and add new evidence to the framework established in Chapter 2. Chapter 3 is an empirical study based on a sample of 8086 firm-years across the years 2007-2015 in China. Ownership structure is examined in terms of different forms, namely, state ownership, managerial ownership, and foreign ownership. State ownership is decomposed into government agency, central state-owned enterprise (hereafter, SOE), and local SOE ownership types, in the further testing. Results of this study show that state ownership, especially government agency ownership, is associated with a decrease in China's derivatives usage, through logistic regression analysis. The findings of the study extend the literature in this area by ascertaining new determining factors in derivatives usage.
Chapter 4 empirically tests the effect of derivatives usage on firms' risk. Firms' risks are measured as total risk, firm-specific risk and market risk. This study reveals a positive relationship between derivatives usage in the baseline OLS model. In particular, commodity price derivatives show a strong positive relationship with all of the three risk measures. The study also employs instrumental variable regressions to control for the potential problem of endogeneity. In addition, by dividing the entire sample into SOEs and non-SOEs, the study finds that the increased total risk effect mainly comes from the derivatives usage of SOEs rather than non-SOEs. Overall, these findings indicate that Chinese firms, especially SOEs, tend to use derivatives to speculate rather than for hedging. These findings in Chapter 4 have significant implications for policymakers and derivatives users.
Overall, this thesis advances the development of corporate hedging and derivatives usage research by providing a comprehensive understanding of the current significant themes and potential future research trends in this field. This thesis also enriches the research framework presented in Chapter 2 by further providing new empirical evidence from an emerging market in Chapters 3 and 4.