THE IMPACT OF DERIVATIVES USE ON FIRM VALUE: DO SMALLER FIRMS BENEFIT MORE? (EVIDENCE FROM BORSA ISTANBUL)

Abstract

While the impact of derivatives use on firm value is still debated theoretically and empirically, whether smaller or larger firms benefit more from the use of derivatives is largely untouched empirically. In this context, the impact of the intensity of derivatives use on firm value separately for smaller and larger firms using derivatives is analyzed with the 2010-2021 annual data of 70 non-financial Borsa Istanbul (BIST) firms. Difference and System Generalized Method of Moments (GMM) estimation results of the dynamic panel data model show that derivatives use positively and significantly affects firm value in smaller firms, and there is no significant effect of derivatives use on firm value in larger firms. Theories proposing that derivatives use can increase firm value are valid for smaller firms. On the other hand, in BIST, smaller firms benefit more than larger firms from derivatives use. The results of the analysis are also consistent with theories suggesting that the value-enhancement effects of derivatives use for hedging are concentrated in smaller firms. The results are encouraging for smaller firms discussing the decision related to financial risk management with derivatives.