Factors Influencing Derivatives Usage by Selected Listed Companies in the Philippines

Abstract

This study examined the different firm-level factors that affect listed Philippine companies’ decision to use derivatives for corporate hedging.  Data from annual reports of 74 corporations over a span of five years (2007 to 2011) were gathered, resulting in 329 firm-year observations.  Results of random-effects logistic regression showed that, on one hand, firm size and presence of employee stock option plans were significant incentives for firms to use corporate hedging.  On the other hand, liquidity and the existence of growth opportunities were negative influences on derivatives usage.  These results may be consistent with the reality that the Philippine derivatives market is underdeveloped relative to the rest of Asia.  Only large and financially sophisticated firms, such as those that can develop stock option plans, are more likely to utilize corporate hedging techniques.  The negative effect of liquidity further supports this assertion.  Philippine firms in the sample would rather use liquidity than derivatives as a way of anticipating potential cash flow volatility.  Philippine firms may prefer to use financial buffer, rather than financially sophisticated tools such as derivatives.  The study exposed that only large or financially savvy corporations are more likely to take advantage of the benefits of hedging.  Philippine regulatory agencies and market participants must work harder to make corporate hedging an alternative that all corporations can take advantage of.