The Effect of Derivatives Use on Firm Value and Performance: Evidence From UK Financial Firms

We study the effect of derivatives use for both trading and hedging on firm value and financial and market performance using a hand-collected data sample from UK financial firms. We show that the use of derivatives for foreign exchange and interest rate risk hedging enhances value, and that hedging with derivatives erodes financial and market performance. We also find that derivatives users are larger, more leveraged, pay dividends more frequently, and have more diversified businesses and investment opportunities than the non-users. Finally, we conclude that the 2008-09 financial crisis did not decrease the popularity of derivatives among financial firms.