Determinants of Derivatives Usage and Its Effect on Firm Risk: Evidence from Indonesian Non-Financial Firms

Abstract

The purposes of this research are to determine factors influencing firm derivatives usage and to analyze its effect on firm risk. The objects of this research are non-financial firms listed on Indonesian Stock Exchange for the year of 2015. Financial performance and corporate governance are employed in this research as important factors influencing derivatives usage and firm risk. Current ratio, debt to equity ratio, return on assets and total assets turnover ratio are used to assess financial performance. Managerial ownership, independence of board commissioners and commissioners’ education are used to assess corporate governance. The firm risk is measured by calculating the volatility of firm daily stock returns. This research employs path analysis in order to examine the relationship between financial performance, corporate governance, derivatives usage, and firm risk. The main finding of this research is that the derivatives usage has a negative relationship with firm risk. There is evidence that the firms tend to have lower risk if using more derivatives products as a risk management instrument.

Keywords: financial performance, corporate governance, derivatives usage, firm risk