The Impact of Institutional Differences on Derivatives Usage

A Comparative Study of US and Dutch Firms

G.M. Bodnar, A. de Jong, V. Macrae

Research output: Working paperDiscussion paperOther research output

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Abstract

This paper tests the influence of institutional differences on risk management practices.Several survey studies have investigated derivatives usage for risk management purposes in the US (see, among others, Bodnar, Hayt, Marston and Smithson, 1995 and Bodnar, Hayt and Marston, 1996, 1998).In this paper, we compare derivative practices of US and Dutch firms.This comparison is interesting because the institutional setting for Dutch firms differs from the US setting with respect to shareholder orientation, international trade, disclosure regulation, and the reliance on financial markets.In a number of survey studies additional countries have been studied, such as New Zealand (Berkman, Bradbury and Magan, 1997), Sweden (Alkebäck and Hagelin, 1999) and Germany (Bodnar and Gebhardt, 1999).In contrast with these papers, we facilitate a comparison by applying a matching and a weighting strategy, which corrects for different distributions over industry and size classes in the Dutch and US samples.After these corrections, the remaining results can be attributed to institutional differences.We find that Dutch firms hedge more financial risk. Because of the greater openness of the Netherlands, Dutch firms experience far more foreign exchange exposure and hedge more currency risk.US firms have more concerns regarding derivative usage, which may be linked to the stricter disclosure requirements in the US.US firms also focus more on accounting earnings, which may be attributable to the shareholder orientation in the US versus the stakeholder orientation in the Netherlands.Whereas Dutch firms tend to rely on OTC-transactions, US firms use exchange-traded derivatives and therefore require a higher counter party rating for derivatives transactions. This distinction can be accredited to the differences in the financial environments between the US and the Netherlands.The aforementioned results indicate that institutional differences between the US and the Netherlands have a significant effect on the risk management practices and derivatives use of US and Dutch firms.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages44
Volume2001-62
Publication statusPublished - 2001

Publication series

NameCentER Discussion Paper
Volume2001-62

Fingerprint

Derivatives
Comparative study
Institutional differences
The Netherlands
Risk management
Hedge
Shareholders
Management practices
Industry
Accounting earnings
Country studies
Rating
Sweden
Germany
Currency risk
Financial markets
International trade
New Zealand
Stakeholder orientation
Weighting

Keywords

  • risk management
  • hedging
  • derivatives

Cite this

Bodnar, G. M., de Jong, A., & Macrae, V. (2001). The Impact of Institutional Differences on Derivatives Usage: A Comparative Study of US and Dutch Firms. (CentER Discussion Paper; Vol. 2001-62). Tilburg: Finance.
Bodnar, G.M. ; de Jong, A. ; Macrae, V. / The Impact of Institutional Differences on Derivatives Usage : A Comparative Study of US and Dutch Firms. Tilburg : Finance, 2001. (CentER Discussion Paper).
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Bodnar, GM, de Jong, A & Macrae, V 2001 'The Impact of Institutional Differences on Derivatives Usage: A Comparative Study of US and Dutch Firms' CentER Discussion Paper, vol. 2001-62, Finance, Tilburg.

The Impact of Institutional Differences on Derivatives Usage : A Comparative Study of US and Dutch Firms. / Bodnar, G.M.; de Jong, A.; Macrae, V.

Tilburg : Finance, 2001. (CentER Discussion Paper; Vol. 2001-62).

Research output: Working paperDiscussion paperOther research output

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AB - This paper tests the influence of institutional differences on risk management practices.Several survey studies have investigated derivatives usage for risk management purposes in the US (see, among others, Bodnar, Hayt, Marston and Smithson, 1995 and Bodnar, Hayt and Marston, 1996, 1998).In this paper, we compare derivative practices of US and Dutch firms.This comparison is interesting because the institutional setting for Dutch firms differs from the US setting with respect to shareholder orientation, international trade, disclosure regulation, and the reliance on financial markets.In a number of survey studies additional countries have been studied, such as New Zealand (Berkman, Bradbury and Magan, 1997), Sweden (Alkebäck and Hagelin, 1999) and Germany (Bodnar and Gebhardt, 1999).In contrast with these papers, we facilitate a comparison by applying a matching and a weighting strategy, which corrects for different distributions over industry and size classes in the Dutch and US samples.After these corrections, the remaining results can be attributed to institutional differences.We find that Dutch firms hedge more financial risk. Because of the greater openness of the Netherlands, Dutch firms experience far more foreign exchange exposure and hedge more currency risk.US firms have more concerns regarding derivative usage, which may be linked to the stricter disclosure requirements in the US.US firms also focus more on accounting earnings, which may be attributable to the shareholder orientation in the US versus the stakeholder orientation in the Netherlands.Whereas Dutch firms tend to rely on OTC-transactions, US firms use exchange-traded derivatives and therefore require a higher counter party rating for derivatives transactions. This distinction can be accredited to the differences in the financial environments between the US and the Netherlands.The aforementioned results indicate that institutional differences between the US and the Netherlands have a significant effect on the risk management practices and derivatives use of US and Dutch firms.

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BT - The Impact of Institutional Differences on Derivatives Usage

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CY - Tilburg

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Bodnar GM, de Jong A, Macrae V. The Impact of Institutional Differences on Derivatives Usage: A Comparative Study of US and Dutch Firms. Tilburg: Finance. 2001. (CentER Discussion Paper).