Abstract
Risk management has been gaining tremendous fame for the last couple of years. Firms in developed and developing countries are facing a variety of risks, i.e., foreign exchange risk, interest rate risk, commodity price risk, and equity risk. It calls for such hedging techniques that mitigate this risk level, thus, allowing corporations to enjoy a solid return. This paper draws attention to a new determinant of hedging, i.e., the role of ownership concentration in risk management using derivative instruments. For this purpose, a sample data of 101 non-financial firms listed on the Pakistan Stock Exchange (PSX) for six years, ranging from 2010–2016, is used. The Mann-Whitney test for difference in users and no-users is applied along with logistic regression to check the effect of ownership concentration on derivative usage. The finding of this study reveals that concentrated owners are less likely to use derivatives for hedging purposes due to concentrated owners’ interests (top five shareholders & largest shareholder, family owners). Whereas, executives are more likely to engage in the use of derivatives to increase the value of their stocks. However, associated companies are significantly less involved in hedging activities. These results are extremely advantageous for policymakers in corporations to create a more stable corporate environment.
Highlights
One of the unresolved questions linked with firms’ financial decisions is why firms hedge with derivatives
The results indicated that board independence, board diversity, board meetings, block holders, Chief Executive Officer (CEO) age, and CEO tenure did not show any significant effect on firms’ hedging decisions
The results depicted that the largest shareholder who came from a family and firms that are controlled by family owners were significantly and negatively associated with financial hedging
Summary
One of the unresolved questions linked with firms’ financial decisions is why firms hedge with derivatives. Ample empirical evidence focuses on the use of derivative instruments and their impact on risk This strand investigates whether the use of derivatives is consistent with existing hedging theories (Tufano 1996; Géczy et al 2007; Haushalter 2000; Graham and Rogers 2002), whether the motivation behind their use is speculation (Géczy et al 2007), or whether the use of derivatives impacts risk (Guay 1999; Allayannis and Ofek 2001; Zhang 2009; Bartram et al 2011). Compliance with governance mechanisms restricts management to channel their energies away from value-destroying activities and into value-creating activities, and, in this way, shareholders’ rights are protected It develops a system for effectively implementing derivative instruments for hedging purposes.
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