Impact of Derivatives Usage on Firm Value: Evidence from Non Financial Firms of Pakistan

Abstract

The current study aims at investigating the impact of derivatives usage on firm value. For the given purpose, a sample of 107 non-financial firms listed on Karachi Stock Exchange (KSE) for the period of 2006-2010 is considered. Firm value is measured mainly through Tobin’s Q along with two more alternative measures named Alt. Q1 and Alt. Q2. Usage of three types of derivatives named General Derivatives (GD), Foreign currency derivatives (FCD) and Interest rate derivatives (IRD) are used as independent variables. Different panel data techniques of LM (Lagrange Multiplier) test, Random effect, Hausman specification test and fixed effect are applied in order to analyze whether the use of derivatives increases, decreases or does not have any impact on firm value. The current study finds no significant impact of derivatives usage on firm value while using Tobin’s Q is used as valuation measure. However use of FCD is associated with lower firm value while use of IRD adds value only in case when alternative measures of firm value (Alt. Q1 and Alt. Q2) are considered.