Effects of derivative use on firm value: Evidence from Nordic financial firms

Abstract: Abstract Financial firms are carrying more risks than non-financial firms as they are operating with highly liquid assets. Use of derivatives is one of hedging techniques used in protecting firms from such kind of risks. There has been considerable discussion in academia of whether or not derivative usage can be considered to be value relevant. This is a question, which relate to both risk management and value maximization perspectives in terms of theory, but also discussions in regards to hedging irrelevance (M&M) and arbitrage theory as well: Does the use of derivatives affect listed Nordic financial firms’ market value, if so how? Thereby, the main purpose of this thesis is to find out whether or not there a relationship between derivative use and firm value, which would be evidenced from sample taken from listed Nordic financial firms. In addition to this main purpose, this thesis furthermore sets out to answer whether geographical diversification and firm size contribute toward the effect of derivative use on firm value. Moreover, to answer the research question, a positivist philosophical standpoint with objectivist viewpoint taken, which subsequently leads the author to utilize quantitative methods and statistical analysis to the data collected for this study. Here, different panel models are fitted to the data to account effects that exist within it. To explain the findings, a theoretical framework is built upon two main theories and prior literatures. Here, on the theories such as M&M theory as well as arbitrage theory are dealt with. On the prior literatures, different scholars finding on the derivative use and firm value relationship discussed.   After looking at the results and the analysis, one can draw the conclusion that there is a positive relationship between derivative usage and firm value. The analysis this thesis took the entire 96 Nordic financial firms sample for study period of four years (2012-“015), and from this sample size 80% found derivative users and the rest are non-users. Further, the study result and analysis lead the author to conclude that derivative usage has a positive impact on Nordic financial firms’ value.   Overall, this thesis can find evidence for a value-relevance of derivative usage to firm value in the Nordic markets. Essentially, Tobin’s Q ratio used as a proxy for firm value and panel data model has been used in the analysis. The test result of the study shows that there is a positive statistically and economically significant derivative use premium for Nordic financial firms. Keywords: Risk management; Hedging; Derivatives; Derivatives use; Firm value