Board Composition And Corporate Use Of Interest Rate Derivatives

Borokhovich, Kenneth A.; Brunarski, Kelly R.; Crutchley, Claire E.; Simkins, Betty J.

doi:10.1111/j.1475-6803.2004.t01-1-00079.x

Cited by 96 publications

(103 citation statements)

References 40 publications

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“…Debt maturity % of debt which matures in more than 1 or 2 years "+" , Géczy et al 1997 Option ownership "?" Number, dummy, or market value of shares obtainable by options (exercisable within 60 days) by managers (and directors) , Lin/Smith 2007, Graham/Rogers 2002, Knopf et al 2002, Rogers 2002, Allayannis/Ofek 2001, Gay/Nam 1998, Howton/Perfect 1998, Fok et al 1997, Géczy et al 1997, Dolde 1995, Nance et al 1993 Berkman/Bradbury 1996 , Lel 2006, Mardsen/Prevost 2005, Borokhovich et al 2004, Graham/Rogers 2002, Knopf et al 2002, Rajgopal/Shevlin 2002, Rogers 2002, Allayannis/Ofek 2001, Guay 1999, Gay/Nam 1998, Fok et al 1997, Géczy et al 1997, Mian 1996, Nance et al 1993 Current year change in net tangible assets + depreciation/ net income + depreciation Progressive corporate tax structure "+" Howton/Perfect 1998, Mian 1996, Nance et al 1993 Tax credits (1) Dummy which indicates the availibility of TCs "+" , Mian 1996 Tax credits (2) Absolute available TCs (scaled) or deferred income (scaled) "+" , Dionne/Garand 2003, Fok et al 1997, Nance et al 1993 Tax Knopf et al 2002, Rajgopal/Shevlin 2002, Rogers 2002, Allayannis/Ofek 2001, Haushalter 2000, Guay 1999…”

Section: Analystsmentioning

confidence: 99%

“…As theory suggests, the existence of multiple share classes leads to higher derivatives' use (Bartram, Brown and Fehle, 2009). Large blockholders are always negatively associated with corporate hedging (Mardsen and Prevost, 2005;Borokhovich et al, 2004;Haushalter, 2000;Tufano, 1996 Underinvestment and asset substitution problems are more important for firms with high growth opportunities, as the value of these firms would suffer most from failing to invest into the available profitable projects, and high leverage, as these firms are more likely to end up in states of nature in which these conflicts can occur. 7 As a result, high growth opportunities and high leverage should increase the incentives for corporate hedging.…”

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confidence: 99%

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Corporate Hedging and Shareholder Value

Aretz

Bartram

2010

J of Financial Research

135

118

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According to financial theory, corporate hedging can increase shareholder value in the presence of capital market imperfections such as direct and indirect costs of financial distress, costly external financing, and taxes. This paper presents a comprehensive review of the extensive existing empirical literature that has tested these theories, documenting overall mixed empirical support for rationales of hedging with derivatives at the firm level. While various empirical challenges and limitations advise some caution with regard to the interpretation of the existing evidence, the results are, however, consistent with derivatives use being just one part of a broader financial strategy that considers the type and level of financial risks, the availability of risk-management tools, and the operating environment of the firm. In particular, recent evidence suggests that derivatives use is related to debt levels and maturity, dividend policy, holdings of liquid assets, and the degree of operating hedging. Moreover, corporations do not just use financial derivatives, but rely heavily on pass-through, operational hedging, and foreign currency debt to manage financial risk. Keywords Corporate Hedging and Shareholder Value AbstractAccording to financial theory, corporate hedging can increase shareholder value in the presence of capital market imperfections such as direct and indirect costs of financial distress, costly external financing, and taxes. This paper presents a comprehensive review of the extensive existing empirical literature that has tested these theories, documenting overall mixed empirical support for rationales of hedging with derivatives at the firm level. While various empirical challenges and limitations advise some caution with regard to the interpretation of the existing evidence, the results are, however, consistent with derivatives use being just one part of a broader financial strategy that considers the type and level of financial risks, the availability of risk-management tools, and the operating environment of the firm. In particular, recent evidence suggests that derivatives use is related to debt levels and maturity, dividend policy, holdings of liquid assets, and the degree of operating hedging. Moreover, corporations do not just use financial derivatives, but rely heavily on pass-through, operational hedging, and foreign currency debt to manage financial risk.

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Section: Analystsmentioning

confidence: 99%

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confidence: 99%

Corporate Hedging and Shareholder Value

Aretz

Bartram

2010

J of Financial Research

135

118

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“…Dionne, Maalaoui Chun and Triki (2013) found that board independence plays an active role in firms' risk management through increasing hedging activities. Similarly, the results of Borokhovich, Brunarski, Crutchley, and Simkins (2004) showed that the proportion of independent directors on the board increases interest derivatives usage. However, Dionne and Triki (2004) and Marsden and Prevost (2005) reported that the presence of independent directors had no effect on a firm's risk management policy, such as decisions about a hedge or the extent of the hedge.…”

Section: Risk Management Process and Frameworkmentioning

confidence: 81%

Does Firms' Risk Management Human Capital Reduce the Likelihood of Financial Distress?

Jia¹

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iii AbstractIn light of the corporate collapses and global financial crisis, risk management has been highlighted as an ever increasing important element of corporate governance.As risk management committees (RMC) bear the fundamental responsibility of risk management, RMCs' human capital performs a crucial role in risk management governance and warrants further investigation.The purpose of this study is to investigate the association between firms' RMC human capital and firms' management of risk, in terms of firm performance and the likelihood of financial distress. This study is motivated by the paucity of research on risk management governance and the Australian Security Exchange Corporate With respect to the association between RMCs, separate RMCs existence, and firms' management of risk in terms of firm performance and the likelihood of financial distress, the results revealed that the number of firms with a separate RMC remained stable over time, whereas there was an increasing trend of combined RMC establishment, and a decrease in the number of firms without a RMC. The regression results reveal that the existence of a RMC and a separate RMC were not significantly related to firm performance and the likelihood of financial distress. However, the findings show that the existence of a separate RMC moderated the relationship between firm risk and a firm's accounting performance. In terms of RMC human capital, the overall RMC human capital score was positively related to firm performance and market measurement of the likelihood of financial distress. With Does firms' risk management human capital reduce the likelihood of financial distress? v respect to individual RMC human capital characteristics, the total amount of experience (as a type of general human capital) was positively related to accounting performance, while RMC members' board tenure (as a type of firm-specific human capital) was negatively related to market performance.The findings make several important contributions. Firstly, this study contributes to the literature by providing empirical evidence about human capital theory from a risk management perspective, and draws on research to determine whether human capital is associated with firm performance and research that determines the association between risk management and firm performance. Secondly, this study informs policy setters about the current risk management practice in Australia, and provides implications for regulating risk management practices. Overall, the findings of this study highlight the importance of RMCs' human capital.

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“…Management, though skilled in running a firm in a particular industry, lacks the broader knowledge supplied by the outside directors. In a study 'Board Composition and Corporate use of Interest Rate Derivatives', [20] established a positive relation between the relative influence of outside directors and the quantity of derivatives used, indicating that outside directors take an active role in derivatives usage and that firms employ hedging in the shareholders best interest. The study also shows a significant and positive relation between the quantity of interest rate derivatives used by firms and the proportion of outside directors on the firm's board.…”

Section: Literature Reviewmentioning

confidence: 99%

The Impact of Corporate Governance on Derivatives Usage–Empirical Evidence from African Non-Financial Firms

Osuoha

Samy

Osuoha

2015

BJEMT

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The study investigates the impact of corporate governance on derivatives usage in African nonfinancial firms. Using a sample of 760 African non-financial firms from 17 African countries, the study shows that derivatives usage among African non-financial firm is very low. The study finds that the main reasons why most African firms do not use Derivatives are lack of knowledge about derivatives, absence of organized derivatives market and absence of derivatives experts. The results also show that Board composition is the strongest measure of corporate governance impacting derivatives usage. Derivatives usage increases with increase in the number of executive directors but has an inverse relationship with the board size. Derivatives user firms have strong corporate governance in place to mitigate the risk of derivatives misuse that could hurt the firms.

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Board Composition And Corporate Use Of Interest Rate Derivatives

Cited by 96 publications

References 40 publications

Corporate Hedging and Shareholder Value

Corporate Hedging and Shareholder Value

Does Firms' Risk Management Human Capital Reduce the Likelihood of Financial Distress?

The Impact of Corporate Governance on Derivatives Usage–Empirical Evidence from African Non-Financial Firms

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