Financial derivative instruments can be considered as a value enhancing tool to the firms. The aim of our research is to provide a deep analysis of whether the use of derivatives increases firm value to UK non-financial corporations. It analyzes three main areas: (1) what are the determinants of the use of derivatives; (2) does the use of derivatives materially increase firm value; and (3) does the use of derivatives reduce the market risk exposures firms face. It is demonstrated that, in a world with no taxes, no transaction costs, and with fixed investment policies, hedging with derivatives is irrelevant to firm value. However, theory suggests that derivative instruments can increase firm value when the premises of a perfect market have been relaxed, since they can eliminate corporate tax liabilities, financial distress costs, dependence on costly external financing, and agency costs. These propositions are supported by empirical evidence from the UK context where it is shown that firms use derivatives in order to reduce their expected costs of financial distress and enhance their market values. Moreover, we introduced a mixed result on the relationship between the use of derivatives and firm values. We also achieved a degree of success in providing empirical evidence in support of the hypotheses that the use of foreign currency and interest rate derivatives reduces exchange rate and interest rate exposures
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:544221 |
| Date | January 2006 |
| Creators | Wu, X. Y. |
| Publisher | University of Birmingham |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
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