Foreign Currency Derivative and Firm Value: An Australian Study
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In Australian context, only a single study done by Nguyen and Faff (2007) has addressed the question of whether the use of derivatives directly affects firm value. They found that the use of derivatives in general, and the use of interest rate derivatives in particular, are negatively related to firm value. However, using a sample of firms from 1999 and 2000, Nguyen and Faff (2007) may pick up noise from an event in March 1999, which saw the disclosure of derivative information become compulsory for the first time in Australia. Owing to the confounding nature of their results, this paper examines the use of foreign currency derivatives in a sample of 106 Australian nonfinancial firms between 2003 and 2008 and its potential impact on firm value. An insignificant relation between firm value (represented by Tobin’s Q) and using foreign currency derivatives is found. The findings of this study contradict the study done by Nguyen and Faff (2007).
Abstract
In Australian context, only a single study done by Nguyen and Faff (2007) has addressed the question of whether the use of derivatives directly affects firm value. They found that the use of derivatives in general, and the use of interest rate derivatives in particular, are negatively related to firm value. However, using a sample of firms from 1999 and 2000, Nguyen and Faff (2007) may pick up noise from an event in March 1999, which saw the disclosure of derivative information become compulsory for the first time in Australia. Owing to the confounding nature of their results, this paper examines the use of foreign currency derivatives in a sample of 106 Australian nonfinancial firms between 2003 and 2008 and its potential impact on firm value. An insignificant relation between firm value (represented by Tobin’s Q) and using foreign currency derivatives is found. The findings of this study contradict the study done by Nguyen and Faff (2007).
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