Version 1
: Received: 22 October 2023 / Approved: 23 October 2023 / Online: 24 October 2023 (07:43:51 CEST)
How to cite:
Vengesai, E. The Role of Derivatives Use on Firms’ Capital Cost and Financial Stability: Evidence from South African Listed Non-financial Firms. Preprints2023, 2023101455. https://doi.org/10.20944/preprints202310.1455.v1
Vengesai, E. The Role of Derivatives Use on Firms’ Capital Cost and Financial Stability: Evidence from South African Listed Non-financial Firms. Preprints 2023, 2023101455. https://doi.org/10.20944/preprints202310.1455.v1
Vengesai, E. The Role of Derivatives Use on Firms’ Capital Cost and Financial Stability: Evidence from South African Listed Non-financial Firms. Preprints2023, 2023101455. https://doi.org/10.20944/preprints202310.1455.v1
APA Style
Vengesai, E. (2023). The Role of Derivatives Use on Firms’ Capital Cost and Financial Stability: Evidence from South African Listed Non-financial Firms. Preprints. https://doi.org/10.20944/preprints202310.1455.v1
Chicago/Turabian Style
Vengesai, E. 2023 "The Role of Derivatives Use on Firms’ Capital Cost and Financial Stability: Evidence from South African Listed Non-financial Firms" Preprints. https://doi.org/10.20944/preprints202310.1455.v1
Abstract
Derivatives products have become essential in portfolio diversification, price discovery and risk hedging. Derivatives are complex instruments; their role is twofold, risk management and speculation, and their actual Impact on the underlying assets’ behaviours are not well understood. Little is documented empirically on how these instruments’ two-edged roles influence firms’ financing decisions, firm risk exposures, and stability. Given the growing interest in using derivatives in risk management and portfolio engineering, this study examines the practical impact of derivatives usage on the underlying firm’s financing policy and stability. The paper uses data from South African listed non-financial firms for the period 2000 to 2019. The study employs a dynamic panel model estimated with System Generalised Methods of Moments (GMM). The initial analysis shows that derivatives use reduces the cost of capital and increases firm stability. However, further in-depth analysis provides evidence that extensive use of derivatives increases firms’ capital costs and negatively impacts financial stability. These findings imply that the risk embedded in derivatives’ speculation dominates their risk management function. The results are subjected to numerous controls for robustness, including financial leverage, firm size, cashflows and asset tangibility.
Keywords
derivatives use; hedging; cost of capital; WACC; cost of equity; GMM; earnings stability
Subject
Business, Economics and Management, Finance
Copyright:
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
