Determinants of Corporate Hedging Policy: The Use of Interest Rate Derivatives by Non-Financial Firms of Pakistan

  • Shaukat Ali PhD Scholar, Department of Management Sciences, Islamia College Peshawar, Pakistan
  • Muhammad Fahad Siddiqi Lecturer, IBMS, The University of Agriculture Peshawar
  • Seema Zubair Lecturer, Department of Maths/Stat/Computer Science, The University of Agriculture Peshawar
Keywords: Hedging, Interest rate derivatives, Non-financial firms, Pakistan.

Abstract

Usually, firms use interest rate derivatives to hedge interest rate risk. Similarly, some non-financial firms in Pakistan are also engaged in the use of interest rate derivatives to hedge their exposure to interest rate risk.

Purpose: The purpose of this study is to identify determinants of interest rate derivatives used by non-financial firms in Pakistan and to identify any differences between non-financial firms using interest rate derivatives and non-interest rate derivatives.

Methodology: Since interest rate derivatives are taken as dependent binary variables, binary digits 1 and 0 are assigned to firm and non-user interest rate derivatives.  As a result, the Logit model is used to identify the determinants of interest rate derivative use. Besides, users and non-users of interest rate derivatives are two groups independent of each, and therefore the Mann Whitney U test is used to identify the difference between them.

Results: In line with the literature, the non-parametric Mann Whitney U test resulted in significant differences between interest rate derivative users and non-users. While using the Logit model, there was a significant positive relationship between financial distress costs, asset growth, cash flow, firm size, and interest rate derivatives use. However, there was a negative relationship between profitability (ROA) and interest rate derivatives.

Limitation: Since most financial firms use derivatives for trading rather than hedge purposes, the scope of the study is limited to non-financial firms that use derivatives for hedge purposes. Also, the study was launched in 2013-14, so the data collected and used for the period 2006-12 will be used.

Implication: The findings suggest that large, financially distressed firms can hedge their interest rate risk and benefit from the optimal utilization of interest rate derivatives.

Originality: The study was the first attempt to explore interest rate derivatives in non-financial firms in Pakistan and pave the way for further exploration of the subject matter. Besides, the original data were extracted from the annual reports of the sampled firms.

Published
2021-02-25