The Effects of Derivative Use on the Probability of Financial Distress: Are Firms Using Derivatives for Hedging or Speculation?

Assoc Prof Amrit Judge

Nottingham University Business School

About the Speaker

Amrit Judge is an Associate Professor of Finance at Nottingham University Business School. His research interests center on risk management for non-financial corporations, the use of derivatives by firms, the impact of derivatives on firms' value and risk, hedging methods, corporate risk taking incentives, measuring exchange rate risk, capital structure, credit ratings, access to finance, corporate bond markets and credit market conditions. Amrit is currently involved in a research project examining the link between the use of derivatives and default probabilities, the cost of debt, cost of equity and firm value for a large sample of EU firms. He is also investigating the role of credit ratings in facilitating access to capital market debt and the process of debt funding disintermediation for a large sample of European, Asian, Latin American and North American firms.

Amrit has published several articles in international academic journals on the subject of corporate risk management, the value effects of using derivatives, methods of risk management, stock and derivatives market efficiency, capital structure, credit ratings and access to finance. He has presented his research at international academic conferences and practitioner conferences.

About the Seminar

The question of whether firms are using derivatives for hedging or speculation is important in light of attempts by regulators to curb the use of Over the Counter (OTC) derivatives as a response to the 2008 financial crisis, concerns about systemic risk in the financial sector and more recently the prospect of the introduction of the financial transactions tax.

This paper examines the effects of derivative use on the probability of financial distress using a large sample of UK non-financial firms during the period 1999-2010. We employ a market-based measure of default probability and extend previous studies that rely heavily on accounting based proxies for the probability of financial distress. Our results show that use of derivatives is associated with a reduction in the probability of default for our sample firms. We also find that interest rate (IR) derivative use has a greater impact on the probability of default than foreign currency (FC) derivative use.