Financial Risk Management, Usage of Derivatives and Corporate Governance

Abstract

In an increasingly integrated business world, organisations are vulnerable to various types of financial risk. To minimise the down side impact from such risks, derivatives have been commonly used as hedging instruments to mitigate adverse performance outcomes. There is a growing concern over risk management measures taken by companies following major financial crisis in the world and board of directors is increasingly held accountable for such issues. However, in emerging markets, anecdotal evidence suggests that usage of derivatives to hedge financial risk is still at low extent and as such its effectiveness to mitigate risk exposure is questionable. This study examines the determinants of derivatives usage in the contexts of an emerging market from the perspective of corporate governance. Using data of top 100 non-financial listed companies in Malaysia, logistic regression analysis was conducted on the research models and the results show that board independence and directors remuneration are positively related to derivatives usage. Secondly, the presence of women directors moderates the relationship between indirect shareholdings of directors and derivatives usage. The settings of this study reflect Asian based culture in which the sample firms are characterised by highly concentrated ownership structure and low representative of women directors. Therefore, the findings provide empirical evidence to the policy makers on the role of independent directors and gender diversity on risk management practices for countries with similar characteristics.