IMPACT OF DERIVATIVES USER ON FIRMS’ PERFORMANCE OF SHARI’AH COMPLIANT FIRMS
Abstract
The study examined the impact of derivatives usage on the performance of Shari'ah-compliant firms in Malaysia. The study employed a Generalised Method-of-Moment estimator (System-GMM) on a set of panel data from 2012 to 2017. A paired sample t-test for mean difference and a Wilcoxon Signed-ranks test was performed to examine the performance difference between users and non-users of derivatives. The study provided strong evidence of a significant difference in performance between users and non-users of derivatives. Moreover, the study observed better performance among derivative users than non-derivative users. The findings enriched the current Islamic financial market literature and contributed to a better understanding of the hedging activities among Shari’ah-compliant firms. The study offered new evidence on risk management using derivatives in the Islamic financial market.
References
Abdullah, A., & Ismail, K. N. I. (2017). Company-specific characteristics and the choice of hedge accounting for derivatives reporting: Malaysian case. International Journal of Accounting, Auditing and Performance Evaluation, 13(3), 280-292.
https://doi.org/10.1504/IJAAPE.2017.085183
Abdul-Rahim, R., A. Wahab, A., & Yusoff, N. A. (2019). Impact of shariah-compliant status on firms' decision to practice forex hedging. Journal of Islamic Accounting and Business Research, 10(5), 756-769.
https://doi.org/10.1108/JIABR-06-2016-0076
Adam, T. R., & Fernando, C. S. (2006). Hedging, speculation, and shareholder value. Journal of financial economics, 81(2), 283-309.
https://doi.org/10.1016/j.jfineco.2005.03.014
Afza, T., & Alam, A. (2011). Corporate derivatives and foreign exchange risk management A case study of non-financial firms of Pakistan. The Journal of Risk Finance, 12(5), 409-420.
https://doi.org/10.1108/15265941111176145
Ahmad, N., & Haris, B. (2012). Factors for using derivatives: Evidence from Malaysian non-financial companies. Research Journal of Finance and Accounting, 3(9), 79-88.
Ahmed, H. (2009). Financial crisis, risks and lessons for Islamic finance. ISRA International Journal of Islamic Finance, 1(1), 7-32.
https://doi.org/10.55188/ijif.v1i1.69
Allayannis, G., & Ofek, E. (2001). Exchange rate exposure, hedging and the use of foreign currency derivatives. Journal of International Money and Finance, 20(2), 273-296.
https://doi.org/10.1016/S0261-5606(00)00050-4
Allayannis, G., & Weston, J. P. (2001). The use of foreign currency derivatives and firm market value. The Review of Financial Studies, 14(1), 243-276.
https://doi.org/10.1093/rfs/14.1.243
Allayannis, G., Lel, U., & Miller, D. P. (2011). The use of foreign currency derivatives, corporate governance, and firm value around the world. Journal of International Economics, 87(1), 65-79.
https://doi.org/10.1016/j.jinteco.2011.12.003
Allen, F., & Santomero, A. M. (1998). On the theory of financial intermediation. Journal of Banking & Finance, 142(2), 1461-1485.
https://doi.org/10.1016/S0378-4266(97)00032-0
Ameer, R. (2009). Value‐relevance of foreign‐exchange and interest‐rate derivatives disclosure. The Journal of Risk Finance, 10(1), 78-90.
https://doi.org/10.1108/15265940910924517
Ameer, R. (2010). Determinants of corporate hedging practices in Malaysia. International Business Research, 3(2), 120-130.
https://doi.org/10.5539/ibr.v3n2p120
Ameer, R., Isa, R. M., & Abdullah, A. (2011). A survey on the usage of derivatives and their effect on cost of equity capital. The Journal of Derivatives, 19(1), 56-71.
https://doi.org/10.3905/jod.2011.19.1.056
Ameer, R., Othman, R., & Mahzan, N. (2012). Information asymmetry and regulatory shortcomings in profit sharing investment accounts. International Journal of Islamic and Middle Eastern Finance and Management, 5(4), 371-387.
https://doi.org/10.1108/17538391211282854
Antônio, R. M., Lima, F. G., dos Santos, R. B., & Rathke, A. A. T. (2019). Use of derivatives and analysts' forecasts: New evidence from non-financial brazilian companies. Australian Accounting Review, 29(1), 220-234.
https://doi.org/10.1111/auar.12268
Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29-51.
https://doi.org/10.1016/0304-4076(94)01642-D
Arif, N. A. M., Muda, R., Alam, M. M., & Mohamad, S. (2019). The impact of interest rate changes on the Islamic foreign exchange forward in the Malaysian derivative market. Jurnal Pengurusan, 56, 26-37.
https://doi.org/10.17576/pengurusan-2019-56-03
Ayturk, Y., Gurbuz, A. O., & Yanik, S. (2016). Corporate derivatives use and firm value: Evidence from Turkey. Borsa Istanbul Review, 16(2), 108-120.
https://doi.org/10.1016/j.bir.2016.02.001
Baber, H. (2018). How crisis-proof is Islamic finance?: A comparative study of Islamic finance and conventional finance during and post financial crisis. Qualitative Research in Financial Markets, 10(4), 415-426.
https://doi.org/10.1108/QRFM-12-2017-0123
Bae, S. C., & Kim, H. S. (2016). Foreign currency debt financing, firm value and risk: Evidence from Korea surrounding the global financial crisis. Journal of Financial Studies, 45(1), 124-152.
https://doi.org/10.1111/ajfs.12123
Bae, S. C., Ho, T., & Soo, R. (2018). Managing exchange rate exposure with hedging activities : New approach and evidence. International Review of Economics and Finance, 53, 133-150.
https://doi.org/10.1016/j.iref.2017.10.017
Bae, S. C., Kim, H. S., & Kwon, T. H. (2017). Currency derivatives for hedging: New evidence on determinants firm risk and performance. The Journal of Future Market, 22(1), 1-21.
Baltagi, B. H. (2005). Econometrics Analysis of Data (3rd Edition). England: John Wiley and Sons, Ltd.
Bank Negara Malaysia (2017). Annual Report Bank Negara Malaysia 2017. https://www.bnm.gov.my/documents/20124/6432787/ar2017_en_book.pdf
Bartram, S. M. (2019). Corporate hedging and speculation with derivatives. Journal of Corporate Finance, 57, 9-34.
https://doi.org/10.1016/j.jcorpfin.2017.09.023
Bartram, S. M., Brown, G. W., & Conrad, J. (2011). The effects of derivatives on firm risk and value. Journal of Financial and Quantitative Analysis, 46(4), 967-999.
https://doi.org/10.1017/S0022109011000275
Belghitar, Y., Clark, E., & Mefteh, S. (2013). Foreign currency derivative use and shareholder value. International Review of Financial Analysis, 29, 283-293.
https://doi.org/10.1016/j.irfa.2012.02.004
Ben Khediri, K. (2010). Do investors really value derivatives use? Empirical evidence from France. Journal of Risk Finance, 11(1), 62-74. Berger, P. G., & Ofek, E. (1995). Diversification's effect on firm value. Journal of financial economics, 37(1), 39-65.
https://doi.org/10.1108/15265941011012688
Blankley, A., Lamb, R., & Schroeder, R. (2002). The disclosure of information on market risk: evidence from the Dow 30. Managerial Auditing Journal, 17(8), 438-451.
https://doi.org/10.1108/02686900210444789
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115-143.
https://doi.org/10.1016/S0304-4076(98)00009-8
Bodnar, G. M., Jong, A. D., & Macrae, V. (2003). The impact of institutional differences on derivative usage: a comparative study of US and Dutch firms. European Financial Management, 9(3), 271-297.
https://doi.org/10.1111/1468-036X.00221
Bouwman, C. H. S. (2014). Managerial optimism and earnings smoothing. Journal of Banking and Finance, 41(1), 283-303.
https://doi.org/10.1016/j.jbankfin.2013.12.019
Brunzell, T., Hansson, M., & Liljeblom, E. (2011). The use of derivatives in Nordic firms. European Journal of Finance, 17(5-6), 355-376.
https://doi.org/10.1080/1351847X.2010.543836
Choi, J. J., Mao, C. X., & Upadhyay, A. D. (2013). Corporate risk management under information asymmetry. Journal of Business Finance & Accounting, 40(1-2), 239-271.
https://doi.org/10.1111/jbfa.12008
Chong, L. L., Chang, X. J., & Tan, S. H. (2014). Determinants of corporate foreign exchange risk hedging. Managerial Finance, 40(2), 176-188.
https://doi.org/10.1108/MF-02-2013-0041
Coles, J. L., Lemmon, M. L., & Felix Meschke, J. (2012). Structural models and endogeneity in corporate finance: The link between managerial ownership and corporate performance. Journal of Financial Economics, 103(1), 149-168.
https://doi.org/10.1016/j.jfineco.2011.04.002
Demarzo, P. M., & Duffie, D. (1995). Corporate incentives for hedging and hedge accounting. The Review of Financial Studies, 8(3), 743-771.
https://doi.org/10.1093/rfs/8.3.743
Dionne, G., Gueyie, J. P., & Mnasri, M. (2018). Dynamic corporate risk management: Motivations and real implications. Journal of Banking and Finance, 95, 97-111.
https://doi.org/10.1016/j.jbankfin.2017.08.011
Dodd, R. (2009). Exotic Derivatives Losses in Emerging Markets: Questions of Suitability, Concerns for Stability. IMFWorking Paper.
Fahlenbrach, R., & Stulz, R. M. (2009). Managerial ownership dynamics and firm value. Journal of Financial Economics, 92(3), 342-361.
https://doi.org/10.1016/j.jfineco.2008.06.005
Finance Development Report (2021). IFDI Report 2021. https://www.refinitiv.com/en/resources/special-report/islamic-finance-development-report
Froot, K. A., Scharfstein, D. S., & Stein, J. C. (1993). Risk management: Coordinating corporate investment and financing policies. The Journal of Finance, 48(5), 1629-1658.
https://doi.org/10.1111/j.1540-6261.1993.tb05123.x
Gay, G. D., Lin, C., & Smith, S. D. (2011). Corporate derivatives use and the cost of equity. Journal of Banking and Finance, 35(6), 1491-1506.
https://doi.org/10.1016/j.jbankfin.2010.10.033
Global Islamic Financial Report (2019). Islamic Finance Country Index- IFCI 2019, Retrieved from: http://gifr.net/publications/gifr2019/ifci.pdfIslamic
Guay, W. R. (1999). The impact of derivatives on firm risk: An empirical examination of new derivative users. Journal of Accounting and Economics, 26(1-3), 319-351.
https://doi.org/10.1016/S0165-4101(98)00032-9
Haron, R., Othman, A. H. ., Nomran, N. M., & Husin, M. M. (2020). Corporate governance and firm performance in an emerging market: The case of Malaysian firms. In Handbook of research on accounting and financial studies (pp.208-226). IGI Global.
https://doi.org/10.4018/978-1-7998-2136-6.ch010
Hentschel, L., & Kothari, S. P. (2001). Are corporations reducing or taking risks with derivatives?. Journal of financial and Quantitative Analysis, 36(1), 93-118.
https://doi.org/10.2307/2676199
Jin, Y., & Jorion, P. (2006). Firm value and hedging: Evidence from U.S. The Journal of Finance, 61(2), 893-920.
https://doi.org/10.1111/j.1540-6261.2006.00858.x
Jobst, A. A. (2013). Derivatives in Islamic finance: there is no right way to do the wrong things opportunities for investors. The Journal of Investing, 22(1), 7-21.
https://doi.org/10.3905/joi.2013.22.1.007
Kathir, I. (1988). Tafsir Al-Qur'an an Al-'Azim. Cairo: Dar Al-Hadith, 2:505
Lang, L. H. P., & Stulz, R. M. (1994). Tobin's Q, corporate diversification , and firm performance. Journal of Political Economy, 102(6), 1248-1280.
https://doi.org/10.1086/261970
Lau, C. K. (2016). How corporate derivatives use impact firm performance?. Pacific-Basin Finance Journal, 40, 102-114.
https://doi.org/10.1016/j.pacfin.2016.10.001
Ledhem, M., & Mekidiche, M. (2020). Economic growth and financial performance of Islamic banks: a CAMELS approach. Islamic Economic Studies, 28(1), 47-62.
https://doi.org/10.1108/IES-05-2020-0016
Linsley, P. M., & Shrives, P. J. (2006). Risk reporting: A study of risk disclosures in the annual reports of UK companies. British Accounting Review, 38(4), 387-404.
https://doi.org/10.1016/j.bar.2006.05.002
M. Bhagawan, P., & P.J Lukose, J. (2017). The determinants of currency derivatives usage among Indian non-financial firms: An empirical study. Studies in Economics and Finance, 34(3), 363-382.
https://doi.org/10.1108/SEF-09-2014-0172
Mackay, P., & Moeller, S. B. (2007). The Value of Corporate Risk Management. The Journal of Finance, 62(3), 1379-1419.
https://doi.org/10.1111/j.1540-6261.2007.01239.x
Magee, S. (2013). Foreign currency hedging and firm value: A dynamic panel approach (pp. 57-80). Palgrave Macmillan UK.
https://doi.org/10.1057/9781137025098_3
Mian, S. L. (1996). Evidence on corporate hedging policy. Journal of Financial and quantitative Analysis, 31(3), 419-439.
https://doi.org/10.2307/2331399
Mitchell, R. (2010). Rebuilding trust: next steps for risk management in financial services. Economist Intelligence Unit Limited report. Available at: http://graphics. eiu. com/upload/eb/SAS_2010_Rebuilding_trust_WEB. pdf, last accessed, 6.
Modigliani, F., & Miller, M. H. (1963). American economic association corporate income taxes and the cost of capital. The American Economic Review, 53(3), 433-443.
Mohamad, S., Othman, J., Roslin, R., & Lehner, O. M. (2014). The use of Islamic hedging instruments as non-speculative risk management tools. Venture Capital, 16(3), 207-226.
https://doi.org/10.1080/13691066.2014.922824
Nafis, A., & Mohammad Shadique, R. (2016). Shariah-compliant equities: Empirical evaluation of performance in the European market during credit crunch. Islamic Finance,19, 535-553.
Nguyen, H., & Faff, R. (2002). On the determinants of derivative usage by Australian companies. Australian Journal of Management, 27(1), 1-24.
https://doi.org/10.1177/031289620202700101
Nguyen, H., & Faff, R. (2010a). Are firms hedging or speculating? The relationship between financial derivatives and firm risk. Applied Financial Economics, 20(10), 827-843.
https://doi.org/10.1080/09603101003636204
Nguyen, H., & Faff, R. (2010b). Does the type of derivative instrument used by companies impact firm value? Applied Economics Letters, 17(7), 681-683.
https://doi.org/10.1080/13504850802297822
Nguyen, H., & Liu, M. H. (2014). Effective derivative hedging and initial public offering long-run performance. Accounting and Finance, 54(4), 1263-1294.
https://doi.org/10.1111/acfi.12036
Othman, R., & Ameer, R. (2009). Market risk disclosure: Evidence from Malaysian listed firms. Journal of Financial Regulation and Compliance, 17(1), 57-69.
https://doi.org/10.1108/13581980910934045
Panaretou, A. (2014). Corporate risk management and firm value: Evidence from the UK market. The European Journal of Finance, 20(12), 1161-1186.
https://doi.org/10.1080/1351847X.2013.766625
Perez Gonzalez, F., & Yun, H. (2013). Risk management and firm value: Evidence from weather derivatives. Journal of Finance, 68(5), 2143-2176.
https://doi.org/10.1111/jofi.12061
Ramli, N. E., & Haron, R. (2017). Debt determinants of shari'ah approved firms: Empirical evidence from Malaysia. Journal of Islamic Finance (Special Issue), 6(1), 188-204.
https://doi.org/10.12816/0047349
Seng, C. K., & Thaker, H. M. T. (2018). Determinants of corporate hedging practices: Malaysian evidence. Report on Economics and Finance, 4(4), 199-220.
https://doi.org/10.12988/ref.2018.8418
Servaes, H. (1996). The value of diversification during the conglomerate merger wave. Journal of Finance, 51(4), 1201-1225.
https://doi.org/10.1111/j.1540-6261.1996.tb04067.x
Shen, X., & Hartarska, V. (2013). Derivatives as risk management and performance of agricultural banks. Agricultural Finance Review, 73(2), 290-309.
https://doi.org/10.1108/AFR-07-2012-0036
Smith, C. W., & Stulz, R. M. (1985). The determinants of firms' hedging policies. Journal of Financial and Quantitative Analysis, 20(4), 391-405.
https://doi.org/10.2307/2330757
Stulz, R. M. (1984). Optimal hedging policies. Journal of Financial and Quantitative analysis, 19(2), 127-140.
https://doi.org/10.2307/2330894
Supanvanij, J., & Strauss, J. (2010). Corporate derivative use and the composition of CEO compensation. Global Finance Journal, 21(2), 170-185.
https://doi.org/10.1016/j.gfj.2010.06.004
Tanha, H., & Dempsey, M. (2017). Derivatives usage in emerging markets following the GFC: Evidence from the GCC countries. Emerging Markets Finance and Trade, 53(1), 170-179.
https://doi.org/10.1080/1540496X.2016.1157467
Wahab, A. A., Rahim, R. A., & Janor, H. (2019). Role of foreign exchange exposure in determining hedging practises in Malaysia. International Journal of Economics and Management, 13(1), 79-91.
Wahab, A. A., Rahim, R. A., & Janor, H. (2020). Impact of foreign exposure and shariah compliant status on malaysian firms' hedging practice. Jurnal Pengurusan, 58(1), 1-13.
Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of Financial Economics, 40(1), 185-211.
https://doi.org/10.1016/0304-405X(95)00844-5
Zamzamir@Zamzamin, Z., Haron, R., Ahmad Baharul Ulum, Z. K., & Othman, A. H. A. (2021). Non-linear relationship between foreign currency derivatives and firm value: Evidence on Sharīʿah compliant firms. Islamic Economic Studies, 28(2), 156-173.
https://doi.org/10.1108/IES-09-2020-0036
Zeidan, R., & Rodrigues, B. (2013). The failure of risk management for nonfinancial companies in the context of the financial crisis: Lessons from Aracruz Celulose and hedging with derivatives. Applied Financial Economics, 23(3), 241-250.
Copyright (c) 2023 UNIMAS Publisher
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
Copyright Transfer Statement for Journal
1) In signing this statement, the author(s) grant UNIMAS Publisher an exclusive license to publish their original research papers. The author(s) also grant UNIMAS Publisher permission to reproduce, recreate, translate, extract or summarize, and to distribute and display in any forms, formats, and media. The author(s) can reuse their papers in their future printed work without first requiring permission from UNIMAS Publisher, provided that the author(s) acknowledge and reference publication in the Journal.
2) For open access articles, the author(s) agree that their articles published under UNIMAS Publisher are distributed under the terms of the CC-BY-NC-SA (Creative Commons Attribution-Non Commercial-Share Alike 4.0 International License) which permits unrestricted use, distribution, and reproduction in any medium, for non-commercial purposes, provided the original work of the author(s) is properly cited.
3) For subscription articles, the author(s) agree that UNIMAS Publisher holds copyright, or an exclusive license to publish. Readers or users may view, download, print, and copy the content, for academic purposes, subject to the following conditions of use: (a) any reuse of materials is subject to permission from UNIMAS Publisher; (b) archived materials may only be used for academic research; (c) archived materials may not be used for commercial purposes, which include but not limited to monetary compensation by means of sale, resale, license, transfer of copyright, loan, etc.; and (d) archived materials may not be re-published in any part, either in print or online.
4) The author(s) is/are responsible to ensure his or her or their submitted work is original and does not infringe any existing copyright, trademark, patent, statutory right, or propriety right of others. Corresponding author(s) has (have) obtained permission from all co-authors prior to submission to the journal. Upon submission of the manuscript, the author(s) agree that no similar work has been or will be submitted or published elsewhere in any language. If submitted manuscript includes materials from others, the authors have obtained the permission from the copyright owners.
5) In signing this statement, the author(s) declare(s) that the researches in which they have conducted are in compliance with the current laws of the respective country and UNIMAS Journal Publication Ethics Policy. Any experimentation or research involving human or the use of animal samples must obtain approval from Human or Animal Ethics Committee in their respective institutions. The author(s) agree and understand that UNIMAS Publisher is not responsible for any compensational claims or failure caused by the author(s) in fulfilling the above-mentioned requirements. The author(s) must accept the responsibility for releasing their materials upon request by Chief Editor or UNIMAS Publisher.
6) The author(s) should have participated sufficiently in the work and ensured the appropriateness of the content of the article. The author(s) should also agree that he or she has no commercial attachments (e.g. patent or license arrangement, equity interest, consultancies, etc.) that might pose any conflict of interest with the submitted manuscript. The author(s) also agree to make any relevant materials and data available upon request by the editor or UNIMAS Publisher.
