Determinants of Corporate Hedging Practices in Malaysia

Transcription

1 Deerminans of Corporae Hedging Pracices in Malaysia Dr. Rashid AMEER Accouning Research Insiue and Faculy of Accounancy Universii Teknologi MARA (UiTM) Shah Alam, Selangor, 40450, Malaysia Tel: Absrac This paper examines he impac of he firm specific facors on he use of derivaive insrumens for Malaysia firms. We find ha here is a significan relaionship beween he use of derivaives and foreign sales, liquidiy, firm growh, managerial ownership and size. Our findings sugges ha only a few lised Malaysian firms have appropriae undersanding of he derivaives insrumens o miigae risks in inernaional business environmen. Mos Malaysian managers seem o be risk averse and do no undersand he upside of aking posiion in he derivaives markes. Keywords: Hedging, Risk managemen, Derivaives, Inernaionalizaion, Malaysia 1. Inroducion Risk managemen has been a maer of coninuous concern o mos corporaions since he fall of Breon Woods Sysem in he middle of 1970s; in paricular, he changes in he exchange raes have been a major risk o firms involved in he impors and expors (Barram, 2008). I is no surprising ha mos of he previous sudies have focused predominanly on he firm s foreign currency risk (Hagelin 2003; Allayannis and Ofek, 2001; Géczy e al. 1997), besides ineres rae risk (Graham and Rogers, 2000; Carcano and Fores 1997; Mian 1996). And recenly oher marke risks such as commodiy risk, (see e.g., Lien and Yang, 2008; Alizadeh, Nomikos, and Pouliasis, 2008) and oher non-financial risks such as informaion processing, echnological, sraegic and leadership risk (Linsley and Shrives, 2006) has become cenre of aenion. However, his empirical evidence regarding he choice of hedging insrumens and deerminans of foreign exchange risk hedging seems o reflec decision making of managers in he developed counries conex which have found o have less informaion asymmery, efficien marke for corporae conrol, beer insiuional and legal sysems. In his paper, we argue ha deerminans of hedging pracices ouside he developed world would be differen due o unique firm specific characerisics. A few sudies have invesigaed marke risk disclosure pracices of he firms in Asia-Pacific region. For insance, He and Ng (1998) examined he foreign exchange exposure of Japanese mulinaional corporaions; Nguyen and Faff (2003), Chalmers and Godfrey (2000) and Chalmers (2001) invesigaed he impac of derivaives reporing for firms in Ausralia, and Hu and Wang (2006) examined usage of derivaives among firms in Hong Kong. A feaure of his sudy ha disinguishes i from previous empirical ess of foreign currency hedging is ha i uses variables ha uniquely capure he governance sysem and mechanism in an emerging marke. We argue ha by including ownership variables, our paper builds on lieraure ha have examined he effec of ownership srucure on he deerminans of risk managemen sraegies and influence of managerial incenives and exernal monioring on he decision o use derivaives (see Hagelin, Holmen, and Prambord, 2006; Whidbee and Wohar, 1999). Furhermore, he robusness of he findings of he previous sudies ha rely on developed counries sample need o be examined agains evidence from oher newly indusrialized counries such as Malaysia. Thus, a major moivaion behind his sudy is o invesigae he facors ha influence he demand of he derivaives, in paricular, foreign exchange and ineres rae derivaives in he case of Malaysian lised firms. Furhermore, Malaysian Accouning Sandards Board (MASB) inroduced FRS132: Financial Insrumens Disclosure and Presenaion (IAS32) for he firs ime o be adoped by Malaysian firms for financial periods beginning or afer This sandard requires he ype of marke risk being faced by lised companies in Malaysia o be disclosed, and i can be seen as an aemp o make financial reporing sandards in Malaysia a par wih inernaional financial reporing sandards. Thus, we argue ha our sudy is imely o provide evidence of he deerminans of foreign exchange risk hedging pracices among Malaysian firms. 2. Theoreical framework and hypoheses developmen Derivaives are an inegral par of firms risk managemen policy. Marke risk is defined as he risk of loss arising from he adverse changes in he marke raes and prices such as he ineres raes, currency exchange raes, 120

2 Vol. 3, No. 2; April 2010 commodiy prices, or equiy prices. Smih and Sulz (1985) propose ha for value maximizing firms hedging is par of overall corporae financing policy. They sugges ha hedging can affec firm value, hrough changes in ax liabiliies, changes in sakeholder conracing coss, or inerdependencies beween he choice of financial policy and fuure real invesmen decisions. This implies ha hedging can increase a firm s value by simulaneously reducing exernal claims such as axes paid o governmen; bankrupcy coss (boh direc and indirec); and/or agency coss o align managerial ineress wih he ineress of capial suppliers. Hedging can reduce underinvesmen coss (see Myers 1977; Bessembinder, 1991) since i reduces he probabiliy of financial disress by shielding fuure sream of cash flows from he changes in he exchange raes. According o Froo, Scharfsein, and Sein (1993) hedging ensure ha a firm has sufficien inernal funds which would enable i o avoid unnecessary flucuaions in eiher invesmen spending or exernal financing and so increases firm value. Froo e al. (1993) argue ha variabiliy in cash flows will resul in variabiliy in he amoun of invesmen. A decrease in planned invesmen means ha he firm is foregoing posiive ne presen value projecs and since i has insufficien inernal funds he firm is forced o raise cosly exernal finance. In boh Bessembinder (1991) and Froo e al. (1993) analysis he coss of underinvesmen will be greaer for hose firms wih more growh opions. Alernaively, firm could lower he likelihood of financial disress by possessing more liquid asses ensuring ha funds will be available o pay deb claims. Also firms wih higher levels of liquidiy will have less need o access cosly exernal financing o fund heir invesmen programme. Nance, Smih, and Smihson (1993), however, posi ha corporaions can miigae expeced coss of financial disress and agency coss by mainaining a larger shor-erm liquidiy posiion in erms of having a lower dividend payou raio or a higher quick raio. In order o es financial disress cos (underinvesmen) and growh opion hypoheses. Thus, we hypohesize ha H1- here is a posiive relaionship beween long-erm deb raio and derivaives. H2 -here is a posiive relaionship beween he growh opions and derivaives. H3- here is a negaive relaionship beween liquidiy and derivaives. Cash flow models of foreign exchange exposure sugges ha he foreign exposure should be relaed o ne foreign currency revenues (oal revenues minus coss) higher foreign sales would lead o higher use of currency derivaives. Firms wih greaer variaion in cash flows or accouning earnings resuling from exposure o exchange rae risk have greaer poenial benefis of foreign currency hedging. The degree o which a firm s cash flows are affeced by exchange rae changes should depend on he naure of is aciviies, such as he level of expor and impor aciviy, is involvemen in foreign operaions, is compeiors currencies, and he compeiiveness of is inpu and oupu markes. Thus, given he exchange rae uncerainy associaed wih he value of cash flows a a fuure daa ha is denominaed in he foreign currency can be hedged perfecly in he forward marke if he foreign currency value of he cash flow is known wih cerainy. H4- here is a posiive relaionship beween he foreign sales and derivaives. H5- here is a posiive relaionship beween he cash flow volailiy and derivaives. I has been argued ha if a firm faces a convex ax funcion, hen hedging reduces he volailiy of axable income and he firm s expeced ax liabiliy. For a firm facing some form of ax progressiviy, when axable income is low, is effecive marginal ax rae will be low; bu when income is high, is ax rae will be high. If such a firm hedges, he ax increase in circumsances where income would have been low is smaller han he ax reducion in circumsances where income would have been high, hus lowering expeced axes (Graham and Smih, 1999, p. 2241). We es for ax hypohesis: H6- here is a posiive relaionship beween ax losses and derivaives. In addiion, we sugges ha corporae ownership srucure also affec he desirabiliy of hedging. A manager s wealh funcion is a concave or convex funcion of he firm value depending upon his/her invesmen in he firm s equiy. As a manager s invesmen in he firm increases, his/her wealh funcion will increasingly resemble equiy holders payoff funcion ha is linear funcion of firm value over he range of possible oucomes. As managers invesmen in he firm increase, his/her wealh becomes increasingly linear funcion of firm value. Poorly diversified managers wih linear wealh funcion have incenives o engage in more hedging. However, if managers are also given share opions heir wealh funcion becomes convex because of he convex payoff srucure of opions. Previous sudies such as Whidbee and Wohar (1999) and Fok, Carroll and Chiou (1997) found ha managerial and insiuional ownership srucure has significan influence on he corporae hedging 121

3 decisions. We argue ha in he developing counries such as Malaysia, he effec of ownership srucure would be unique compared o he developed markes such as he U.S because of less dispersed ownership and poor porfolio risk diversificaion of managers. The insiuional invesors, on he oher hand, manage porfolios o achieve maximum risk diversificaion herefore we should expec hem o reduce heir ownership in hose firms which have any kind of marke risk. Monioring and discipline of a manager will also affec he relaion beween he manager s wealh and firm value (Whidbee and Wohar, 1999). Based on hese argumens, closely moniored managers should be more likely o hedge. We es wo ownership hypoheses: H7: here is a posiive relaionship beween managerial ownership and derivaives. H8: here is a negaive relaionship beween insiuional ownership and derivaives. I has also been suggesed ha here is a relaionship beween firm size and hedging. There are, however, compeing argumens for eiher a posiive or negaive relaion beween firm size and hedging aciviy. The negaive relaionship beween he firm size and direc bankrupcy coss suggess ha he smaller firms have greaer incenives o hedge. Smaller firms are also faced wih greaer informaion asymmeries and higher financing ransacion coss which are likely o make exernal financing more expensive for smaller firms and herefore hedging more likely. However, smaller firms migh lack he echnology and experise o effecively use derivaives o manage heir risk exposures. Conversely, hedging aciviy exhibis significan informaion and ransacion cos scale economies implying ha larger firms are more likely o hedge. Thus, we argue ha here is an ambiguous relaionship beween he firm size and derivaives. 2.1Measuremen of explanaory variables The annual firm-level financial daa was obained from Thomson Worldscope o calculae explanaory variables. In line wih previous sudies, we use a firm s long-erm deb o oal asses raio denoed by (DEBT). I has been argued ha his variable is linked o probabiliy ha a firm would face coss of financial disress and hence a greaer desire o engage in hedging aciviies. A firm s growh opions are no direcly observable herefore we use hree differen proxies for growh opions - capial expendiure divided by oal sales (CAPEX); he price earnings raio (PE) and he sum of marke value of equiy and book value of deb o oal asses as proxies for growh opions in he firms invesmen opporuniy denoed by (MTB). FS is he raio of he foreign sales o oal sales a he end of year. Cash flow volailiy (CFV) is measured by sandard deviaion of operaing income before depreciaion. We use wo proxies for firm liquidiy as in earlier sudies, (DPS) is he dividends per share and (QA) is he raio of quick asses o oal curren asses as proxies for firm liquidiy. We use log of firms oal asses as proxy for firm size. The shareholding daa a he end of year was obained from shareholders saisics repored in he annual repor each year beween These saisics show a manager s oal shareholding (direc / indirec) divided by oal common share ousanding a he end of each year in he firm. The managers are chief execuive officers, chairman /execuive chairman in our sample, whereas, insiuional invesors in Malaysia are local fund managers, Employee Providen Fund Board, and oher governmen-linked invesmen agencies. We do no include he warrans and opions as well as indirec shareholdings of he managers and insiuional invesors. We also exclude oal board members ownership in he firm because we are ineresed in managerial risk aversion no he enire board as in previous sudies. We use raio of managers and insiuional invesors shareholdings denoed by MAN and INST. 3. Sample and mehodology 3.1 Sample The daa on he foreign currency and ineres rae derivaive insrumens were obained from he firms annual repors. These annual repors were downloaded from Bursa Malaysia Company Announcemen Webpage in PDF forma. To locae a firm s disclosure on he noional amoun of he foreign currency and ineres rae derivaives such as forward conracs, he Find opion in PDF was used o search for key erms such as insrumen, derivaives and hedges in he downloaded PDF files. These key erms were found in he secion iled Financial Risk Managemen and Policies in noes o he accouns in he annual repors. We included in our invesigaion he financial year end noional amoun of foreign currency derivaives (in Ringgi Malaysian) such as he Forward and Fuure conracs, whereas, for ineres rae derivaes, Forward and Swaps conracs. Ohman and Ameer (2009) repor ha Forward conracs are used in high proporion o hedge marke risks by Malaysian companies followed by Fuure and Swap conracs. Ou of 427 firms, only 112 firms me our crieria of non-missing daa on derivaives and oher variables and herefore sufficien firm-year observaions 122

4 Vol. 3, No. 2; April 2010 over he period, The five-year period choice is somewha similar o earlier sudies on derivaives in he developed counries (see e.g., Singh and Upneja, 2007; Allayannis and Weson, 2001). I is worh menioning ha our coverage is beer han previous sudies such as Linsley and Shrives (2006) who sudied 79 UK firms lised wihin FTSE 100 in 2001 and Nguyen and Faff (2003) 77 Ausralian firms in Table 1 shows usage of derivaives according o indusry and he ype of hedging insrumen used o hedge foreign exchange and ineres rae risk. Table 1 show ha ou of 427 firms, only 112 firms disclose he use of foreign currency and ineres rae derivaives. This percenage is lower han hose figures repored for he developed counries in he previous sudies (see Allayannis and Ofek, 2001). Malaysian firm seem o prefer he cusomizaion and flexibiliy of Forward foreign exchange conracs over oher sandardized foreign exchange Opions and Fuure conracs. The res of he firms have used in differen proporion he Forward and Swaps conracs for foreign exchange and ineres rae risk managemen respecively (Ohman and Ameer, 2009). I is imporan o poin ou here ha all he sample firms excep banks disclosed ha rading in derivaives is no allowed under heir financial risk managemen policy. Table 2 shows he summary saisics of he main variables ha are used in mulivariae analysis in his paper. We separae he firm-year observaions ino firms wih foreign sales and wihou foreign sales. We argue ha, such as separaion could explain differen moives of hedging, for insance, firms wihou foreign sales are more likely o use derivaives for paymens of impors and hedge agains changes in he ineres raes. On he oher hand, firms wih foreign sales are more likely o use derivaives for shield fuure cash flows in foreign currencies from adverse movemens in he foreign exchange raes. Besides his apparen economic raionale for hedging, i would be valuable o explore he connecion beween managerial ownership and derivaives usage, i.e., when foreign sales are zero, manager s incenive o hedge migh also be relaed o heir personal wealh maximizaion because poorly diversified managers wih linear wealh funcion have incenive o engage in more hedging. On average, firms wih foreign sales >0 are large firms have higher use of derivaives, DPS, CAPEX and INST han firms wih foreign sales=0. I is noeworhy ha among laer firms managers have higher shareholdings han former firms suggesing ha manager s wealh funcion is linear and increase in equiy invesmen in he firm does lead o hedging. While in he case of former firms, i is plausible ha due o monioring by he insiuional invesors and pressure for good performance, managers have incenives o engage in hedging aciviies. Alhough i can be argued ha among firms wih foreign sale=0, hedging pracices of he firms migh be driven by managers personal wealh maximizaion objecive bu we canno es his proposiion due o following reasons. These firms migh include hose firms ha have only impor paymens o hedge or hose firms which have only ineres rae risk exposure o hedge. Since sample firms do no repor impor expenses and here are limied number of firm-level observaions on foreign floaing rae deb. The correlaion coefficiens repored in Table 3 seem o sugges ha he oal amoun of derivaives used by he firms have significan posiive correlaion wih firms growh opions, foreign sales, size and dividends per share. We do no find any correlaion beween derivaives and ownership, financial risk and oher growh opions variable such as PE raio. There is significan posiive correlaion beween variables used as proxy for growh opions. There is possibiliy ha including all of hese variables ogeher in our model migh lead o muli-collineariy problem, herefore, we use only hose variables in our mulivariae analysis ha does no exhibi his problem using sandard muli-collineariy es such as VIF es. 3.2 Mehodology There are wo disinc mehodologies ha have been used o examine firms hedging decisions- firs, using a dummy variable approach whereby all hedging firms are denoed by 1 and non-hedging firms by 0, and hen a logisic esimaion mehod is used o model he probabiliy of hedging decision agains non-hedging (see e.g., Pennings, 2002; Whidbee and Wohar, 1999). Second, noional amouns or gross value of derivaives has been o explain he amoun of derivaives used by he firms in a linear regression framework (see e.g., Singh and Upneja, 2007; Fok e al, 1997). The main objecive of his paper is o examine he deerminans of foreign currency and ineres rae derivaives for which second approach seems more appropriae. We specify and esimae following regression model for all firms (Noe 1): NDER = β + β DEBT β FS 4 + β MTB + β CFV β QA + β TAXL β MAN 7 + β INST where for a firm i NDER denoes he noional amoun of oal foreign exchange and ineres rae derivaives ousanding (in RM); DEBT is long-erm deb o oal asses raio; MTB denoes he raio of he sum of marke 8 + ε (1) 123

5 value of equiy and book value of deb o oal asses; QA is defined as abiliy o conver asses ino cash quickly; FS is he raio of he foreign sales o oal sales a he end of year; CFV denoes he cash flow volailiy measured by sandard deviaion of operaing income before depreciaion; TAXL denoes ax losses obained from; MAN and INST shows he shareholdings of a manager and insiuional invesors as raio of oal ousanding common shares a he year-end (Noe 2). ε is he error erm having he following properies: E( ε, ) = 0. All variables are calculaed as a he end of year and in nominal erms. 4. Resuls We esimae Eq. (1) using he ordinary leas square esimaion mehod by pooling all firm-year observaions in Eviews 6.0. Alhough he Adjused R 2 is relaively similar o Singh and Upneja (2001) sudy on he US lodging firms (Noe 3), we canno compare he resuls wih oher US sudies, for insance, (Allayannis and Ofek, 2001) (Noe 4). However, he diagnosics such as he Whie es for he Heeroskedasiciy in he residuals and he Lagrange Muliplier es for serial correlaion in he residuals suggess ha here is no evidence of Heeroskedasiciy and serial correlaions in he residuals. Furhermore, we also repor Ramsey Rese es saisics which also shows ha he model is correcly specified. We inerpre correc sign on he regression coefficiens as evidence in favor of he hypohesized relaionship as discussed above in secion 2. The esimaed regression coefficiens show ha mos variables have expeced signs excep DEBT, and TAXL (see Table 4). Consisen wih previous sudies, firms foreign sales, liquidiy, growh opions, managerial ownership and size are relaed o greaer level of hedging. In paricular, our resuls seem o sugges ha firms wih higher level of foreign sales and growh opporuniies are acive users of he derivaives, while, firms wih higher raio of quick asses do no use derivaives bu end o use excess liquidiy o absorb unprediced changes in he foreign currency and ineres rae risks. We do no find prediced relaionship for ax losses variable which migh be due o lack of ax concaviy. 4.1Ownership effecs The ownership variables are also significan explanaory variables in our esimaion resuls. The coefficien on MAN is significanly posiive a 1 percen level of significance, suggesing ha increase in managerial ownership leads o higher usage of derivaives because managers ry o minimize risk affecing he reurn on heir invesmen in he firms. Whidbee and Wohar (1999, p.252) sugges ha managers benefi from hedging by reducing he uncerainy associaed wih he level of heir wealh (as funcion of firms value) and by reducing he likelihood ha hey are disciplined for poor firm performance. Effecive monioring mechanism end o make a manager s uiliy funcion concave a low level of firms value and as argued by Smih and Sulz (1985), managers wih concave wealh funcions are likely o hedge as much as possible. INST has a significan negaive sign indicaing ha insiuional invesors in Malaysia do no inves in firms prone o foreign and ineres rae risks. These findings are somewha similar o Solomon e al. (2002) who repor ha insiuional invesors in he UK have lower shareholdings in he firms wih high level of risk disclosures. 4.2Indusry effecs We also incorporae he indusry effecs in our model o es wheher foreign exchange exposure faced by differen indusry secors lead o differen level of hedging. We use dummy variable equal o 1 for four indusry secors consumer producs, indusrial producs, rading/services, and planaion denoed by CP, IP, TS, and PL respecively and 0 oherwise. We use financial secor denoed by FI as base caegory. The resuls are shown in Table 4. There is srong evidence of indusry effecs as shown by significan posiive coefficiens on he CP, TS and PL respecively. 5. Conclusion The aim of his paper has been o exend knowledge abou he facors ha influence he demand for foreign exchange and ineres rae derivaives in developing counries for which here are only a limied number of sudies. The main findings of he paper seems o sugges ha here is a srong relaionship beween he use of derivaives and firms foreign sales, liquidiy, growh opions, managerial ownership and size in Malaysia. In paricular, our resuls sugges ha firms wih higher foreign sales volume and growh opporuniies are acive users of he derivaives. Our findings also seem o indicae ha here migh be differen incenives o hedge foreign exchange risk among Malaysian firms (Noe 5). Among he firms, having no foreign sales bu higher managers shareholdings, managers have incenives o hedge because of personal wealh maximizaion objecive. While in he case of i 124

6 Vol. 3, No. 2; April 2010 firms wih foreign sales and lower managers shareholdings, he insiuional invesors pressure for good performance give managers incenives o engage in hedging aciviies. Our findings confirms ha facors ha significanly affec hedging pracice of US firms as repored by Allayannis and Ofek (2001) also seem o explain he use of derivaives by Malaysian firms. The firm specific facor such as, size of he firm seem o have sronger influence on derivaives use. Our paper has several imporan implicaions for managers and financial regulaors. A presen Malaysian managers are risk averse (Noe 6) and do no undersand he upside of aking posiion in derivaives marke. They should seek he help of consulans and professional bankers o ascerain he risk appeie of heir organizaion before aking he posiion in he derivaives marke. We propose ha fuure research should seek o esablish does firm size also affec he use of oher ypes of derivaives no sudied in his paper. A he same ime, here is a need for research on he sraegy and oulook of banks reasury deparmens providing hese derivaive producs. References Alizadeh, H.A, Nomikos, K.N. and Pouliasis, K.P. (2008). A Markov regime swiching approach for hedging commodiies. Journal of Banking and Finance, 32(9), Allayannis, G. and Ofek, E. (2001). Exchange rae exposure, hedging and he use of foreign currency derivaives. Journal of Inernaional Money and Finance, 20, Allayannis, G. and Weson, J.P. (2001). The use of foreign currency derivaives and fair marke value. Review of Financial Sudies, 14, Barram, M.S. (2008). Wha lies beneah: Foreign exchange rae exposure, hedging and cash flows. Journal of Banking and Finance, 32(8), Barram, M.S., Brown, G.W. and Fehle, F.R. (2003).Inernaional Evidence on Financial Derivaives Usage. Working Paper, Lancaser Universiy, Lancaser, Unied Kingdom. Bessembinder, H. (1991). Forward conracs and firm value: Invesmen incenive and conracing effec. Journal of Financial and Quaniaive Analysis, 26(4), Carcano, N. Fores S. (2008). Hedging agains ineres rae risk: Reconsidering volailiy-adjused immunizaion. Journal of Banking and Finance, 21(2), Chalmers, K. and Godfrey, J.M. (2000). Pracice versus Prescripion in he Disclosure and Recogniion of Derivaives. Ausralian Accouning Review, 11(2), Chalmers, K. (2001).The Progression from Volunary o Mandaory Derivaive Insrumen Disclosures-Look Who s Talking, Ausralian Accouning Review, 11(1), Fok, C.W.R., Carroll, C., Chiou, C.M. (1997). Deerminans of Corporae Hedging and Derivaives: A Revisi. Journal of Economics and Business, 49, Froo, K, Scharfsein, D. and Sein, J. (1993). Risk managemen: Coordinaing corporae invesmen and financing policies. The Journal of Finance, 48, Géczy, C, Bernadee A. M and Schrand, C. (1997). Why firms use currency derivaives. The Journal of Finance, 52, Graham, R.J. Smih, and C.W. Jr. (1999). Tax Incenive o Hedge. The Journal of Finance, 54(6), Hagelin, N. Holmen, M. and Prambord, B. (2006). Family ownership, dual-class shares and risk managemen. Global Finance Journal, 16, Hagelin, N. (2003). Why Firms Hedge Wih Currency Derivaives: An Examinaion of Transacion and Translaion Exposure. Applied Financial Economics, 13, He, J. and Ng, K. L. (1998). The Foreign Exchange Exposure of Japanese Mulinaional Corporaions. The Journal of Finance, 53(2), Lien, D. and Yang, L. (2008). Asymmeric effec of basis on dynamics of fuure hedging: Empirical evidence from commodiy markes. Journal of Banking and Finance, 32(2), Linsley, M.P. and Shrives, J.P. (2006). Risk reporing: A sudy of risk disclosures in he annual repor of UK Companies. The Briish Accouning Review, 38(4), Malaysian Accouning Sandard Board. (2005). Financial Reporing Sandard FRS 132 Financial Insrumens: Disclosure and Presenaion. Malaysian Accouning Sandards Board, Kula Lumpur. 125

7 Myers, S. C. (1977).Deerminans of corporae borrowing. Journal of Financial Economics, 5(2), Ohman, R., Ameer, R. (2009). Marke Risk Disclosure: Evidence from Malaysian Lised Firms. Journal of Financial Regulaion and Compliance 17(1), Nance, D. R., Smih C. W. Jr. and Smihson, C.W. (1993). On he Deerminans of Corporae hedging. The Journal of Finance, 48, Nguyen, H. and Faff, R. (2003). Can he use of foreign currency derivaives explain variaions in foreign exchange exposure? Evidence from Ausralian Companies. Journal of Mulinaional Financial Managemen, 13(3), Pennings, E.M.J. (2002). Pulling he rigger or no: Facors affecing he behavior of iniiaing a posiion in derivaives markes. Journal of Economic Psychology, 23(2), Singh, A. and Upneja, A. (2007). Exend of Hedging in he US lodging indusry, Journal of Hospialiy Managemen, 26(4), Smih, C. W. and Sulz, R. (1985). The deerminans of firms' hedging policies. Journal of Financial and Quaniaive Analysis, 20, Solomon, J.F., Solomon, A., Noron, S.D. and Joseph, N.L. (2000). A concepual framework for corporae risk disclosure emerging from he agenda for corporae governance reform. Briish Accouning Review, 32(4), Whidbee, A.D. and Wohar, M. (1999). Derivaive aciviies and managerial incenives in he banking indusry. Journal of Corporae Finance, 5, Noes Noe 1. We include all firms hose having foreign sales =0 and foreign sales >0. Noe 2. Oher poenial proxies have no been used due o issue of muli-collineariy, see Table 3. Noe 3. Singh and Upneja (2001, able 5) repored R2 of Noe 4. The R2 repored by Allayannis and Ofek is derived from Probi model and herefore no exacly comparable wih our Adjused R2 shown here. Noe 5. The esimaion resuls are all firms having no foreign sales and foreign sales. Noe 6. There are only 30 firms which have repored he use of derivaives over he sample period. 126

8 Vol. 3, No. 2; April 2010 Table 1. Disribuion of Sample and Usage of Derivaives 127

9 Table 2. Descripive Saisics This able shows he descripive saisics of he explanaory variables. DPS, is dividend per share; QA, is he raio of curren asses less invenories divided by oal liabiliies; DEBT, is he raio of long-erm deb o oal asses; PE, is he price earnings raio; CAPEX, is he raio of capial expendiure o oal sales; MTB, is he raio of he sum of he marke value of equiy and book value of deb o oal asses; CFV is he sandard deviaion of operaing income before depreciaion; MAN and INST, are manager s and insiuional invesors shareholding; DERV, is he noional amoun of derivaives; EAR, is oal earnings before exraordinary iems; TA, oal asses ; MV, is he marke value of firm a he end of year. All firms Mean Median Sd. Minimum Maximum DPS QA DEBT PE CAPEX MTB CFV MAN INST DERV (RM millions) EAR (RM millions) TA (RM millions) , MV (RM millions) Foreign sales>0 DPS QA DEBT PE CAPEX MTB CFV MAN INST DERV (RM millions) ,591 EAR (RM millions) , TA (RM millions) MV (RM millions) Foreign sales=0 DPS QA DEBT PE CAPEX MTB MAN CFV INST DERV (RM millions) EAR (RM millions) TA (RM millions) MV (RM millions)

10 Vol. 3, No. 2; April 2010 Table 3. Spearman correlaion resuls 129

11 Table 4. Regression Resuls This able repors he regression resuls. The dependen variable is DERV, he noional amoun of derivaives. DEBT is he raio of long-erm deb o oal asses; MTB is raio of he sum of marke value of equiy and book value of deb o oal asses. FS is raio of foreign sales o oal sales; CFV is he sandard deviaion of operaing income before depreciaion; TAXL denoes repored ax losses; QA is he raio of quick asses o oal liabiliies; MAN and INST are managers and insiuional invesors shareholding in a firm a he end of year. SIZE is naural logarihm of oal asses. Dummy variable equal o 1 for four indusry secors consumer producs, indusrial producs, rading/services, and planaion denoed by CP, IP, TS, and PL respecively and keep financial secor denoed by FI as base caegory. The diagnosics es repored are Heeroskedasiciy in residuals; serial correlaion in he residuals, Ramsey RESET es, and Jarque-Berra (JB) es for normaliy of he residuals. P-values of he ess are shown in (parenhesis). The figures in he square brackes are he [-values]. 130