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Derivatives use empirical studies of the risks listed companies

Author: Anonymous From: www.yourpaper.net Posted: 2010-04-07 12:18:17 Read:
Author: Jia Wei Ying Lan Feng-yun Chen Baofeng
[Abstract] the Western mainstream theory is that the use of derivative financial instruments can reduce the risk of the company's domestic academia in research in this area is not yet over. In this paper, in 2007 to 1151 in China A-share non-financial listed companies cross-section data for the study sample, empirical study of listed company uses derivative financial instruments for risk management of corporate risk. The research results show that the situation in China and abroad, China's listed companies use derivative financial instruments for risk management of systemic risk and the risk of bankruptcy of the company has increased weak effect.
[Keywords] derivative financial instruments; Z-score; system risk; listed companies

Introduction

Beginning in the 1970s, with the rapid development of derivative financial instruments such as foreign exchange, interest rate, a growing number of companies involved in the derivatives market for risk management (Chih-Cheng Wang et al, 2006). Western risk management theory (Smith and Stulz (1985), Mayers and Smith (1990), Myers (1977) and Froot et al. (1993)), the use of derivative financial instruments, establish motives based on reducing the company's risk. In specific cases, such as expensive cost of the financial crisis and serious problem of inadequate investment, the company's risk hedging can increase the value of the company.
However, increasing the motivation of the company's risk management and shareholders. Black and Scholes (1973) pointed out, the shareholders leverage the company's cash flow requirements of the right to remuneration similar to a call option. Jensen and Meckling (1976) pointed out that the because these reward like a call option increases with the volatility of the company maximize shareholder value by increasing the risk of the company's motivation to transfer wealth from outside the company's creditors. However, shareholders may lead to the risk-averse manager specific capital investment activities increased volatility difficulties.
Even if there is no conflict between the shareholders and creditors, the management is still motivated to derivative financial instruments used in non-hedging purposes. For example, because the value of employee stock pre-emption increases with the increase in the volatility of the stock price, management's motivation to engage in activities to increase the company's risk. With similar, when the company's earnings just at or close to the lower limit of the incentive plan, the manager's compensation plan is similar to a call option remuneration. This gives rise to the increase in corporate income fluctuations motivation. However, to maximize the value of the company's compensation plan will the risk preferences motivation into account, and is designed to reduce the adverse impact.
Finally, the management can use derivative financial instruments for speculative fluctuations in interest rates, exchange rates or commodity prices. For example, Dolde (1995) pointed out that close to 90% of the users of derivative financial instruments in determining the combined features of derivative financial instruments, they sometimes will "take a look" (take a view) the volatility of the financial markets. Because of speculative behavior in general is not related to the underlying risk of the enterprise, For this purpose the use of derivative financial instruments is considered to increase rather than reduce the company's risk.
Foreign study results are inconsistent in terms of experience in research, most of that non-financial company uses derivative financial instruments for risk management to reduce the sensitivity of the stock prices of financial risk (Smithson and Simkins, 2005). Domestic academia in research in this area is not yet. The purpose of this paper is to use derivative financial instruments of listed companies for risk management of corporate risk theoretical analysis and empirical research, to test the the foreign hypothesis is consistent with the actual situation of China's listed companies.

Second, the study design

(A) sample selection and data sources
Sample selection
The paper selected in 2007 in Shanghai and Shenzhen A-share non-financial listed companies as the primary sample, to filter these companies. In order to achieve the study purpose, perform the following screening procedures: The financial industry is certain derivative financial instruments, compared with other industries with a larger difference between poor ST companies and compared the results and financial position excluding these companies; there will be a very strong motive to manipulate accounting earnings for next year, and therefore excluded ST. After the screening, the final sample companies for 1151.
Data collection, the author gradually home inspection Shanghai and Shenzhen listed company's annual report, its balance sheet trading financial assets and financial liabilities held for trading "and their notes to obtain information about the company engaged in a type of derivative financial transactions and the amount of information to collect data on whether to use derivatives and the use of reason. If the annual report disclosed the use of derivative financial instruments is one of the important measures of the company's risk management, announced the current once held derivative financial instruments and disclosure of fair value or nominal value, regardless of period-end positions earnings or losses, regardless of the size, identified as the company uses derivative financial instruments for risk management; addition, even if the end of non-derivative financial instruments open positions, but then once held Gains and losses are recognized in profit or loss, will also be identified for the use of derivative financial instruments for risk The management of the company.
2 data sources
The Listed Company uses derivative financial instruments for risk management data collected mainly by hand from the listed companies in the 2007 annual report of the original, and other data from data (www.resset.cn), the financial sector (www.jrj.com.cn Royce) public disclosure of listed companies on the site of the huge influx of information (www.cninfo.com), and the China Securities Regulatory Commission (http:// www.csrc.gov.cn) 2007 annual report. To ensure the reliability of the data, the data sampling review.
This article data processing using SPSS and Excel software, the basic data processing using Excel software, descriptive statistics, parametric tests, non-parametric tests, correlation analysis and regression analysis using the SPSS statistical software.
(B) variable definition and description
1. Explanatory variables selected and calculation
Explanatory variables for the company to risk. In general, the measure of corporate risk variables mainly there are two types: one is based on market data, and the second is based on accounting data based. The former includes the systematic risk and non-system risk; latter including operational risks and financial risks. American scholar Altman (1968) established the famous five-variable Z-score model, market data and accounting data organically combined, that is the ability to measure the risk of bankruptcy of the listed companies. In this paper, two indicators to measure the risk of the company were:
(1) systemic risk. Risk of listed companies in accordance with whether through the combination of assets to be dispersed, can be divided into systematic risk and non-systematic risk. The system risk is the uncertainty caused by factors affecting all listed companies (such as war, political revolution, the reform of the economic system, inflation, interest rate and exchange rate changes). Non-systematic risk to investors to eliminate the risk by holding a diversified portfolio, usually related and company-specific events, plant explosion, theft, the company was taken over, product development, market development, and so on. In this paper, the the annual Beta value of the listed companies represent a system risk.
(2) Z-score model. Created in 1968, American scholar Altman Z scoring (Z-Score) model, the model is mainly applied to the Stock Exchange-listed First group reflects the extent of the financial crisis financial ratios calculated from the financial reports of listed companies, and then on the basis of these ratios given the size of the financial crisis warning level of different weights, the last to get a comprehensive enterprise risk weighted total discriminant Z, with threshold contrast will know the severity of the financial crisis.
The Altman models discriminant function:
Z = 1.2 กม X1 1.4 กม X2 3.3 กม X3 0.6 กม X4 1.0 กม X5
Where: Z = discriminant function; X1 = working capital / total assets, namely corporate working capital relative to total assets ratio, X1 the greater liquidity of the corporate assets, financial condition; X2 = retained earnings / total assets, that is, the proportion of enterprises in a given period of retained earnings reinvestment. X2 The larger the corporate financing and the ability to reinvest the stronger, enterprise, innovation and competitiveness; X3 = EBIT / total assets X3 reflect the company does not consider the profitability of the corporate assets tax and financial leverage factor; X4 = equity total market value / total liabilities, primarily reflecting the judgment of the investors in the company's future prospects, the market capitalization of the debt ratio, the higher the index, the enterprises more investment value, the indicators, particularly in mature capital markets, convincing; X5 = sales / total assets, a measure of the ability of enterprise asset sales revenue.
Failed enterprise statistical analysis of the data based on the past business, Altman draw a the empirical critical data values, that is, Z = 2.675. Z Hutchison score higher than 2.675 for safer corporate, below 2.675 for the corporate existence of the financial crisis or the risk of bankruptcy. Enterprise experience in analysis of business failure, Altman also found an enterprise Z Hutchison score is less than 1.81, the enterprise has actually potential bankruptcy, if you do not take a particularly forceful measures will be difficult to get out of the abyss. In this paper, the Z-Score value represents the company's bankruptcy risk.
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