IMPACT OF DERIVATIVES USAGE ON FIRM

VALUE: A CASE OF NON FINANCIAL FIRMS IN

PAKISTAN

Submitted By

Noreen Akhtar 11-arid-2818 Safia Batool 11-arid-2820

Farwa Shereen 11-arid-2799 Zarqa Ahmed 11-arid-2829

Supervised By

Mr. Abdul Rehman

University Institute of Management Sciences

Pir Mehr Ali Shah Arid Agriculture University
Rawalpindi
 Acknowledgment
First of all thanks Almighty Allah who bestowed us with His greatest blessings i.e knowledge
and wisdom to accomplish our task successfully. We are also thankful to our parent’s immense
support and guidance on each and every step of our lives. We have no words to show gratitude to
our supervisor Mr. Abdul Rehman who provided his valuable guidance on each and every stage
of research work. At the last but not the least, we are thankful to all members of faculty and
administration for providing their priceless support for the accomplishments of our work. Thank
you all. Thanks very much.

Abstract
In most of the literature, Derivatives are the instruments which characteristics and value depend
upon the characteristics and value of any underlying asset typically a commodity, bond, equity or
currency. Example of derivatives includes futures, forward, options and swaps. In Pakistan
financial derivatives are use for hedging purpose is becoming trendier for the last few decades.
Hedging by the use of financial derivatives protects firm’s cash flow and earnings from adverse
exchange and interest rate fluctuation. Now financial institutions provide a range of products like
financial derivatives to manage firm’s financial risks. Hedging theories explain that the
derivatives usage for management of risk could increase firm value because firms face different
problems in real financial markets such as financial distress, problem of underinvestment, cost of
bankruptcy, heavy taxes and costly external financing etc. so at the end derivatives affect firms
value .Our purpose of study was to check whether the firm value is affected by the derivatives
usage or not.
In our research we used firm value as dependent variable and derivatives usage as independent
variable. Data related to derivatives usage was collected from the financial notes of companies’
annual reports. The model which used in our research is based on Lins (2003), Daines (2001) and
(Bashir et al. 2013) model. We used ordinary least square (OLS), descriptive statistics and T-test
analysis in order to find our results. We performed our analysis on two levels; overall firm level,
derivatives users and non users’ level.

The results and findings of our research are same as of the literature. In Pakistan derivatives
usage has significant positive relation with firm value. The firm also has also significant positive
relationship with dividend and Return on assets (ROA) So their relationship with firm is
negative. Family ownership, Institutional ownership, Managerial Ownership also has significant
relationship with firm value. We concluded with results the firm characteristics including
dividend, family ownership, managerial ownership, institutional ownership, return on assets,
size, growth, derivative usage had positive significant effects on value of firm.
 CHAPTER 1
INTRODUCTION

1. INTRODUCTION
Derivatives are defined as the securities of whose value; the one, or more of underlying assets
determine the price. The underlying assets includes the currencies, bonds, stocks, commodities,
interest rates, market indexes and the most common are the bonds. Derivatives is also defined as
the contract between the two or more than two parties or the instrument for the purpose of the
hedging the risk .For example for hedging purpose different types of contracts are used like the
forward contract ,options, and the swaps are used for the purpose of the hedging or the
speculative purposes. For the hedging purposes the European investor could choose the futures
contract as the financial instrument and purchase the currency futures to lock at the
predetermined future rate of the currency for the sale of future stock and the conversion of
currency back into the Euros.
Financial derivatives are the instruments that are linked to the specific financial instrument in the
form of indicators, commodities. From the value of the underlying assets, commodities, the
index the price of financial derivatives can be determined. These financial instruments are used
for the number of purposes like for the most important risk hedging, risk management and the
arbitrage between the speculations or between the markets. Financial derivatives gives direction
to the parties of contract to trade the financial risks like the risk related to interest rate, currency,
price, and the commodity risk. The risk involved in a derivatives agreement can be mitigated or
traded with the help of contract trading and by creating new contracts. Mostly the financial
derivatives are used by the firms to hedge different types of the risk in the market. While the
hedging exposure attracts the lots of financial and the managerial resources however the most
important thing is the knowledge about whether the derivatives instruments increase the firm
value or for the shareholders or not? in theoretical research, it provides rational that why the
firms used the derivatives for the overall firm value .It was suggested by the research that the
financial derivatives adds value to the firms by decreasing the cost of the financial disturbance,
by decreasing cost of taxes and overcome underinvestment problems associated with the
external financing (Froot et al.1993) one more side of this research is link with the fact that
mostly the poorly diversified managers overcomes the risk with the help of firm hedging
activities of firms (smith & stulz 1985). The research with the contribution to the past research
examined the firm’s attributes, which are linked to the usage of derivatives which analyze the
expansion of foreign exchange which are hedge by derivatives. The linked between the
companies’ properties and the risk management, expansion of committed anticipated transaction
are investigated. The hedging transaction exposure can increase the value of firms by decreasing
the costs with the financial disturbance, taxes, and underinvestment’s problems. The translation
exposure increases when the foreign currency financial statement links are converted into the
parent country companies’ currency.
The general recommendation of the finance literature about these types of exposures is that they
are few and sometimes are unrealized so the firm value is not affected largely by them.( Kothari
and Hentschel 1997)used the notional principle to test and analyzed about the risk of cross
sectional risk properties of derivatives users variant from the non derivatives usage or not. But at
the end they were failed to find out that the derivatives as the financial instruments were
associated with the risk increase that was related with the speculation. The research has the main
finding against previous research on the derivatives in the form analyzing the new users of the
derivatives and the combined multiple approaches for the test purpose to check out whether the
use of derivatives for the risk management purpose or not. To analyze the new derivatives users
the considered problems that investigate the relationship among firm risk and value of derivative
usage.
All the firms, which are affected by its core business risks, used derivatives to manage their risk
and to raise the value of companies. So as the result we can say that the positive, negative and on
the other hand inverse relationship exist between the risk and the derivatives. (Skinner 1996)
firms used the derivatives to management of risk so the implementation in the reduction of the
risk arises only at the time when the firms properly used the derivatives. The opposite effect is
expected only at the time when the firms used the derivatives only for the speculation purpose
not for the risk reductions. The hedging theories (smith and stulz 1985), Bessembinder (1991),
Froot et al. (1993), and Leland (1998) suggested in their previous research that the derivatives
usage for hedging purposes puts value in the firm by decreasing taxes and the financial
misbalanced costs. They also suggested that by usage of underinvestment or by allowing the
firms to raise their capacity of debt and gets the benefits of the tax shield instead the uncertainty
also increased firm level value. On the other hand many managers at the firm level used the
derivatives to hedge the risk only for the protection of their business (stulz & smith 1985) .A
main part of the past research focused that how the forms used the derivatives and their influence
on the cast of the firms. This literature also examined that the usage of derivatives was consistent
to the risk management theories or not. (Tufano 1996),(Greczy et al 2007),(Haushalter 2000)
and the (Graham and Rogers 2002) described that derivatives usage for the hedging purposes.
The other research showed that derivatives impact firm risk (Grezy et al 2007) Most recently
another research find out that the effect of the hedging on the company risk and value (Moeller et
al 2007). Specifically (Allayannis.G & Weston 2001) find out that there is the direct relationship
exists among the value of firm and the usage of derivatives. In another research a similar effect
of derivatives was finding out on the oil and the refiners (Bartram et al 2011). He found that a
direct valuation effect of value by the larger scale nonfinancial companies sample from the 47
countries. (Jin and Jorion 2006) also suggested that no influence on derivatives usage on the
sector of oil and gas. Past research was analyzed that the there is unconditional results occurs due
to usage of derivatives on the value of firm and mix results was find out after the research.
According to the research a conditional test was used which help to described the value
implications and the total effects of the use derivatives on the value of firm. Due to this
asymmetric information available investors cannot find out the difference among the substituted
derivatives usage.
The research gives results about the direct link of value of firm with governance related to
corporation.
Ownership Structure:
The ownership structure described the ownership pattern within the organizations and described
that whether the firms owned by the managerial ownership, family or on the other hand by the
institutional ownership. The firms are divided into three main categories based on the 5 per
control threshold.
Managerial ownership:
By using the corporate proxy statement, the information is collected about the firm size, about its
director’s board and on the officer’s ownership. All the directors who are currently work at the
company or being retired and their spouses are considered as the insiders. On the other side there
are some outside directors whose affiliation is existing only in the directorship.
Family ownership:
The family ownership shows the firms founders or the any family members by either blood or
the marriage, or in this case, if the family members as the officer and the director have the
minimum 5 % of the total equity shares in the firms so their ownership is considered as the
family ownership.

Institutional ownership:
The institutional ownership described that how much equity do the financial institutions and their
investors. All the number of institutional owners hold and their total number of the ownership is
measured the ownership dispersion.
Total assets:

Assets include many different categories including the current assets, noncurrent assets,
intangible or the tangible assets. According to the accounting terms the total assets are defined as
the any property, cash and in any resources of the business which the business owners actually
own to run the business operations. All the business assets are broken down in the different parts
including the current or the fixed assets. Each of these categories are further broken down in the
other subcategories .It is important that the total assets of the business must be equal to its
current and the fixed assets or equal to the total liabilities and the shareholder equity.
Dividend:
Dividend value as dummy variable used for the proxy of the markets are takes the value of 1 if
the firms paid the dividend in the given year and if not then the value of 0 is giving. Firm’s
Tobin Q remains high if the firms forego the projects when required financing is not available,
for this reason this variable shows negative correlated with the value of firm.
Firm size:
In this context, the derivatives usage and the firm size we investigated the different factors,
which shows the usage of derivative in the small and the medium enterprises (SMEs) .But effects
of these issues are not always same in the all sizes of the business. The literature was expended
by the studying that the small and the medium enterprises and their firm value after the
derivatives usage. The previous research shows that mostly the large firms used the derivatives
which are affected on their firm value but we talk about the small and the medium sized
companies we know that those types of firms have not the particular departments and the
separate organizational structure for the administration purposes like sales, accounting etc. In
such the situation the risk aversion provide the motivation to the manager’s uncertainty (Mayers
and Smith, 1982; Smith, 1995). The past research shows that the for fluctuation by using the
different variables like company size and the firm type and after that research it was showed that
all companies effect same towards the use of derivatives. However this context firm size is not
only the variables who determined the derivatives. There are many others factors reflects the
managers attitudes, perceptions and priori classifications for the large variation of higher
authorities and the organization structure.
Growth opportunities:
The firm growth also effect on the firm value. Many previous research shows that the current
business growth opportunities and its future investments plan have the positive effect on the
overall profits of the business and hence increase the firm value. The hedgers have the large
investment opportunities so growth of the business can be controlled by the help of by dividing
capital expenditure by total assets. The value of firm is also affected by the opportunities of
future investment (Myers 1977). Future investment opportunities have the direct effect on the
value of the company. Smith and Watts (1992), Sougiannis (1994) and Yermack (1996).

Leverage
The previous research shows that the high leveraged firms are mostly used the derivatives as
compare to the low leveraged firms. (Campbell & Kracaw, 1987),(Modigliani and Miller, 1983),
(Dolde 1995) and (Tufano, 2012). The hedging policies allow the firms to use the more debts and
this is yield to tax shield advantage (Smith and Smithson 1993). Research shows that there is
inverse relation exist on value of firm and leverage. (Titman and Wessels 2012).Further research
(2003) also shows that the inverse relation between the total debt and the value of firm. To
control leverage effect the ration of the long-term debts to the total assets is used.

Liquidity

Firms with higher liquidity have enough internal financing that they need no external financing
for undertaking projects. Therefore, it can be expected that liquidity will positively correlated
with value of firm. With the help of liquidity the probability of financial disturbance can be
decrease, cost of external financing and makes valuable projects affordable. Liquidity is
measured by the help of Current Ratio.

Return on Assets
Profitability is calculated by the help of ROA. According to general perception, profitable firms
have higher Q ratio. ROA is measure by dividing net profit after tax with total assets. For that
purpose data is taken from annual report of non-financial firms mentioned.

Importance of study
In 2001, the future stock was introduced in the Pakistan. In the recent years, the future stock
could not get the attention in the community of the investment. In the year 2007, it was estimated
that the total trading volume of the stock exchange was above the 36 %.At that time the
individuals are more interested specially the all-financial institutions in the year 2007 to the 2008
and it has 26 %volume of the total market. Up to 2011 only 42 companies have permission to
launch the future stocks but now increase in the numbers. After the year 2003 the index future
was operated in the Pakistan and got the attraction of the investors. The index of 30,60, and the
90 day of settlement available in the Pakistan Karachi stock exchange.
Many investors and the financial institutions invest in this index for minimizing the risk of their
business. There are also many institutions, which are not encouraged to excessively use the
mutual funds and some other non-depository entities.
Forward contract are most important for the business and only the reasonable numbers of
financial institutions are used the forward contract. There are formal and the informal contracts
and the mostly forward contracts are unregulated and customized so all the organizations who
used these financial instruments are conscious about their effects on the business. In Pakistan
many companies used the derivatives especially all the multinational companies, cement sector,
farming sector and the investment funds.
The graph shows that in the 2011 the amounts of the derivatives in Pakistan were dropped by the
44 %. It also shows that 13% decrease in the FX option during a year. On the other hand the
cross currency swaps and decreased in this year. In the June 2011 cross currency swaps and the
popular derivatives are dropped by the 9 % owning to the maturity of some contracts from the
telecom sector of Pakistan.

Motivation of study
This study covers the value of firm effect with the use of derivatives of listed companies of
Karachi stock exchange. The data stream is from the year 2006 to the year 2013. This data is
collected from the website of the Karachi stocks exchange, business recorder and the yahoo
finance. This scope of our study is not only limited to the Pakistan but it is also use full for the
others developing countries. Mostly research is based on developed countries that use derivative.
Less research work is done on developing countries. On the other hand these countries are more
effect by the exchange rate exposure as compared to the developed countries. As Pakistan is also
a developing economy and most of the time it is also neglected from such kind of research. On
the other hand we as the developing country have the currency depreciation and the negative
balance of payment. Due to this we are always subject to the high exchange rate exposure. In this
paper we will try to analyze the derivatives effects on the company’s value in the listed
companies of Karachi stock exchange. This research will be very useful for the developing
countries especially for Pakistan.

Research questions
As we are dealing with the foreign currencies and their exposure on the value of the firms, so our
research questions are as follows:
 Does the derivatives usage by a firm have significant impact on its market value or not?
 Does the firm size have significant impact on its market value or not?
 Does the ownership structure have significant impact on its market value?

Objective of study
Pakistan is the developing country and the most of the research, which is conducted on the
developed countries and economies. So here our main objective is to determine the derivative
usage effect’s with respect to the firm value in the listed companies of the Karachi stock
exchange .In this study we examine that the risk exposure which may arises in the listed
companies of the Karachi stock exchange is due to the exchange rate fluctuations. In risk
management derivatives are very important and it is used by many firms to manage the foreign
exchange risk and the risk related to interest rate exposure. Main focus of our study is to examine
the derivative uses and the others corporate hedging policies that are used by the listed
companies of KSE to overcome the risk and increase their firm value. Because the political and
the economical conditions in Pakistan are highly volatile, this caused the reason for the
companies to adopt different hedging policies.
Limitations of study

We have tried our best to make this research practical but still there are some limitations. The
main limitation was the lack of the time. Then there was the difficulty in gathering the required
and the complete data. Another limitation is the unavailability on literature specially related to
the developing and the Asians countries because the little work was done on the derivative in the
developing countries.

Organization of study
Our next parts of research is divided in a way that next chapter is Literature review of previous
related researches. Chapter 3 is based on methodology and Chapter 4 is data analysis and
interpretation of results. Chapter 5 is mainly based on our major findings and conclusion of our
research.
 CHAPTER NO 2

LITERATURE REVIEW

1. LITERATURE REVIEW
History and background of derivative was quite interesting and long as laymen think and
recognize with a little bit controversial stories. A story of bible tells us some insight of derivative
till evolution of finest and sophisticated modern financial derivative. In 1700 BC a person
purchase an option to merry a girl for 7 year labor. Modern economists and financial analysts
provide different opinion about this thrilling incident of derivative, one party argues that it was
option and other thinks it was a forward contract. If we look in the gist of story we surprisingly
witness a very plain type of derivative in ancient times.
Royal exchange of London was first and modern market which permits the use of derivative,
first forward agreement was in 1637. First future contract was emerge in 1650 in Osaka for the
rice. In 1948 establishment of Chicago Board of Trade was hall mark of modern derivatives. At
early phase of derivatives, it deals the commodities mostly but with the passage of time it kept
focus on financial derivative that may be cash settle or offset though taking different position.
After 1970 the growth in derivatives was very high owing to sever exchange rate and interest rate
fluctuation in the economy. Derivatives come into existence in Pakistan in 2001 and derivative
shows an increasing trend in 2007 but still derivative is the least discuss field of fiancé. Research
has been conducted in developed countries but still there is not so much research in non
developed countries. In our study we have focused on all aspects of this topic. We have included
in some literature that to what extent use of derivatives has positive or negative effects on the
value of firm, we also included some literature related to usage of derivative in different
countries around the world. We included some of the literature related to different models
established and used to measure firm value, use of derivative, Ownership structure and the size
of the firms. In our literature review we have included research from almost all sorts of
economies such as developed, emerging, and developing and undeveloped economy.
Khediri and Folus (2010) made a survey and investigated the firm value of French Firms and
execution of hedging techniques in these firms. Firm value was very sensitive or may be effect
by many factors. Firm value was effect by risk and different hedging techniques were used to
overcome this risk. This article also investigated the case of French firms by defining the
relationship between firm value and hedging. This study covered the time period of 2001. Data
in this article was taken through annual reports of 2001 of publically traded French nonfinancial
firms. The sample data was 320 nonfinancial French firms. Basic model that was used in this
study was Tobin’s Q to find out firm’s value. This study found results on the bases of regression
test that are multivariate and univariate. Final conclusion after using univariate regression tests
was users of derivatives found that their firm value was decline as compare to nonusers of
derivative financial instrument. However, after using multivariate tests it had reported the
significant results of using derivatives that match the result of study of US firm’s examination
that use derivatives and firm value enhance by the use of derivatives. But finally as a conclusion
this study found that use of derivatives has no effect on firm value. Main results taken from these
tests were not consistent with predictions that were based on theoretical basis. This study also
concludes that there was difference of results occurs like there were differences occur between
Australian, French and US corporations also. In future the studies can be conducted with
additional analysis to understand the more detailed mechanism through which firm value may
effected by usage of derivatives that may be corporate Governance or managerial ownership
also.

Brown et al (2006) probed the effects of hedging on the success of firms. Hedging was basically
defined as to controlled and manage risk. If hedging was taken as prospectus of firm then
hedging was defined as to manage risk of firm or uncertainty of firm risk. The study covered the
time period of 1993-1998. The main focus of this article was the disclosure of risk and hedging
as to manage this risk that firm suffers and that influence firm’s value. This study investigated
success of 44 firms that use derivatives of publically those trade gold products in USA and
Canada. Data in this study were taken from Ted Reeve a financial analyst. Main purpose of this
data base usage was that it provides detail information on derivative instruments that were taken
by these firms financial analyst for Scotia Capital Markets. It included future production of firms
that was predicted, firms contracts related to use of derivatives that were option contracts etc. it
was taken from study that firms suffer risk of market prices fluctuations so that why selective
hedging techniques were useable. Results supported that producers were more capable to
significantly adjust with that hedging ratios. Results showed that there was negative
autocorrelation in sample of gold prices given in 44 firms. In this study views were taken from
managers on corporate policies by taking into consideration of the tendency of gold producer’s
that how much they rely on hedging with respect to variations in time and results occurs as gold
producers were feeling little bit comfortable with use of selective hedging and gain limited
success not more enough. In future there was recommendation for corporation that use derivative
that they analyze advantage as compare to other participant of market who doesn’t do so.
Berkman and Bradbury (2007) give the inquiry that firm value can increase by hedging. As there
were different factors that probably linkup with hedging and increased firm’s value. In
accordance with this concept this theory also investigates if following factors taken into
consideration then hedging can beneficial for firm value these factors were decreasing rate of
expected taxes, decrease in cost of financial distress and also decrease in agency cost because
these all factors linkup with derivatives and firm value. In this study time period was selected as
1994. For this study only listed firms were taken from New Zealand stock exchange. In this
study foreign firms and financial firms both were excluded. The main reason that was given in
study in doing so was that for foreign firms rule of financial disclosure differ as compare to local
firms and in the defend of financial firms study gives the reason was that financial characteristics
and usage of derivatives were different in comparison of non financial firm. There were 116
firms that are taken in this study and out of these 116 firms 55 hold derivatives on their balance
date. Major finding of this study was that firm value can increase through hedging with reference
to decrease in existence of losses in tax, management of leverage, size, the proportion of
director’s shares, payout ratio and decrease in interest coverage ratio and liquidity. These results
that were obtained through study were not sensitive in regards to derivative usage measurement.
Major finding of this study was that growth in short term assets, equity instruments and foreign
assets have no relation with use of derivatives.

Brennan and Cao (1996) studied and investigated that results related to main issues firm value
derivative trade and information regarding to both of these. Basic objectives of study were risk
management effects and how risk can be managed. For that purpose database was created that
find out fact related to risk management. This study had data for time period of 1991 and for this
data was taken from 40 industries of US. Total firms were taken from these 40 industries were
2000. Basic model that was applied in this study was Tobin’s Q and this model was used for firm
value. In this study Kyle type market makers model used in which all participants risk averse and
their behave was competitive in nature and have limited number of orders. Main finding of this
study was firm value increased through the usage of derivative and main focus of derivative
usage related with reduction of cash volatility. This reduction in cash flow volatility leads firm
towards growth. From Wharton survey that was related to derivative usage of US nonfinancial
firm’s results gained those small firms mostly avoid using derivatives as compare to large firms
and main purpose of derivative was not speculation in nonfinancial firms.
Phan et al (2014) investigated what is the relationship between financial derivatives and firm
value in oil and gas firms. The main reasons for selecting oil and gas firms was the frequent
changes in the prices, effects on cash flows and strong homogeneity of those firms. The reserve
portion of total value has positive relation with firm value which automatically effects
derivatives use. The period of study was 1998-2009 and they had selected 94 firms. According to
the findings of study if costs relating to underinvestment and financial distress reduce then
hedging have potential to increased firm value, hedging with the use of financial derivatives
influenced market firm value? If underlying assets price are stable. Because the firm market
value is unbalanced and conditional on the bases of fluctuation of the fundamental asset price.
The result of study show negative and significant correlation between firm value and use of
derivatives.
Treanor et al (2014) analyzed the connection of corporate risk exposure, hedging policy, and
firm value with respect to US airline industry. The main purpose of study was to investigate that
Connection between rise and fall of airline fuel prices and to find out the relationship between
coming year's fuel needs hedged by airlines and exposure coefficient. When fuel price level
increased and exposure level of prices is high then hedging activities increased by airlines.
Finally most of the work done to find out the previously documented jet fuel hedging premium
illustrated in Carter, Rogers, and Simkins (2006). The main idea behind this research was to
investigate hedging increased firm value or not if yes then the main focus is on how the added
value of the firms maintain by the theory of hedging. The period of study was 1998-2008 they
had selected publicly traded US airlines. They find Capital investment increased if firm value
increased by hedging activities and hedging premium also enhanced investment. The main
results which were found by the study the airline company used the investment cost reduction
method by using the derivatives instruments in the field of jet fuel of company.
According to the result of study that airline company’s investment opportunities and the fuel cost
were positively correlated with each others, on the other hand higher fuel costs are consistent
with lower cash flow.The final result show that firm value is positively associated with the
amount of hedging if airline industry choose hedge ratio that must be related with the benefits of
the firm value by using the hedging instruments.
Zou (2010) investigated in case of unique corporate insurance property that how risks
management effect the value of firm. Corporate insurance involves pure risk and almost every
country invests in insurance activities. And insurance shows that selective hedging instruments
used by many firms. The period of study was 1997 to 2003 and data collected from china. The
main reason for selecting specifically china was Chinese property insurance companies control
risk by using different risk management tools and most of the firms used bank loans. According
to the finding of study low managerial ownership does not encourage managers to maximized
firm value. There is constructive connection between value of firm and corporate risk
management but property insurance had negative effects on sales ratio, firm size and tangible
assets. Results stated that property insurance had positive effects on firm value. This study
provided important extension for future researched like sample involves developed countries like
US where firm level insurance data can be easily available and provides more accurate results.
Antonczyk and Salzmann (2014) studied by adopting different corporate governance measures
does risk aversion level effected firm value in stock market. Objective of study was to
investigate risk preference of people with the help their national culture and checked to what
extent these preferences correlate with firm value. The sample which was considered for this
study were 45432 listed firms collected from 47 countries for the purpose of cross country
analysis. The data consisted of non financial firms and excluded Banks and non financial firms
because valuation ratios of financial firms are not similar to other non financial firms. Data
related to uncertainty avoidance was collected through psychological survey under cross country
analysis. That valuation of firm has no connection with uncertainty avoidance.. This paper
suggested that culture influenced people preferences toward risky financial assets. The result
suggests that risk aversion level vary from culture. And culture had strong effects on corporation
value. The more uncertainty avoiding culture the more chances that people makes risk aversion
decisions. The policy implications of this paper were the policymakers must account for culture
values when they design formal policies for promotion of shareholdings.
Fauver and Naranjo (2010) Studied if cost arising out of agency agreement and management
problem faced by firms then in such a situation derivative influenced on value of firm or not.
The purpose of this study was to test hypotheses that cost due to agency agreement and
management problems make difference between use of derivative and value of firm, because
approximately 50% of the USA non financial firms use derivative and show increasing growth
trend. And derivative usage and firm value is interesting topic from researchers, regulators,
financial market participants and financial press perspective. Firms in the USA mostly used the
financial derivatives to mitigate the imperfections of the markets like the taxes, bank costs, cash
flow management and moral hazard and asymmetric information. They used data from 1991-
2000 .The sample data 1746 non-financial U.S firms. They used the Durbin - Wu- Hausman
(DWH) augmented regression test suggested by Davidson and MacKinnon (1993) for analysis,
and also used regression analysis for agency cost problems and corporate governance and
Tobin’s Q used to measure value of firm. The main results are with the help of firm
characteristics including growth size, ownership structure, profitability and leverage; derivative
usage had mixed effects on firm value. The policy implication of this study was firm value
maximized with derivatives usage if agency cost and monitoring problems reduced.
Jin and Jorion (2010) studied hedging and firm value relationship with reference to USA oil and
Gas production firms. The purpose of study was to test what main reasons creates point of
difference among the value of hedge and non hedge oil and gas price risk, and does hedging
should increase the market value of firm. Data were taken from 119 USA oil and gas production
firms for the period of 1998 to 2001.According to the findings of study hedging by firm is
effective if investors their own future contracts traded on organized exchanges. The result of this
paper suggests that no difference exist among non derivatives and derivatives users firms. This
research provided extension to future research that future new work done on hedging premium.
Fung et al (2012) studied that if property/casualty Insurance Companies use credit default swaps
then to what extent their risk and value effect. The purpose of study was to find out two
hypothesis that are examine how credit default swaps (CDS) participation with total , systematic
and idiosyncratic risk effects insurance companies, second was they investigated how CDS
effects firm performance and market value. The period of study was 2001-2009 .Data was
collected from publicly traded companies. They used Heckman two stage approaches for
analysis. According to the findings of study in life insurance sample show that hedging is
associated with total risk, market risk and idiosyncratic risk. For property and casualty insurance
risk was positively associated with CDS. Firm value result showed that increased in market risk
reduced firm value. The result of study suggests that use of credit default risk increased risk and
decreased firm value because of higher cost of capital. The policy implication was insurance
regulator monitor the insurance companies engaged in credit default swaps.
Brav et al (2008) studied the relationship between hedge fund influence, firm performance and
Corporate Governance, and firm Performance. Objective of study was to investigate firm’s
preference and market reaction toward hedged funds activism and to what extend activism effect
firm performance. The time period of study was 2001-2006.They examined the cross-section of
abnormal returns. The findings of this paper indicated that hedged funds had capacity to
influenced corporate board of management because of difference in organizational form and
incentives. The results showed that the managers who used hedging funds had personal relation
and they don’t face any political and regulatory barriers instead of institutional investors and they
can easily increase the value of firms. This paper showed that there is difference between private
equity and hedge funds.
Bashir et al (2013) made a survey and find out use of derivatives influence value of firm and also
give the evidence from the non financial firms of Pakistan. This study basically based on a fact
that the firms which used derivative are valued higher or not. And for that purpose the sample of
107 non financial companies are collected from the Karachi Stock Exchange between the period
of 2006 to 2010. The result of that study found that there are no direct relationship exists
between the derivative use and the firm value. This study covers a broader area there are huge
difference are exist between US firms and the Pakistani firms. To measure that difference the
Tobin’s Q method are applied to calculate firm value. Main differences are divided in three main
reasons. Firstly the Pakistan is a developing economy and no higher authority should be present
to protect the rights of investors. Secondly in Pakistan there were no highly developed stock
exchanges are existing. And these markets were very necessarily for the use of derivative if these
markets are not stable so as a result these are unable to issue and use the derivative for their
hedging purpose properly. The final main reason was that the Pakistani investors have no
expertise special skills and knowledge about the use of derivative and also don’t know about the
functions and benefits of derivative usage due to that reason they don’t give importance and
convert their mind towards that firms which use derivative for their risk hedging purpose. The
future study can be directed towards the application of derivative by financial companies by
using the dummy variable to check the extended use of derivative usage.

Pramborgs(2003) studied on the relation between geographical diversification, market value of

firm and hedging. In this study the Swedish firm’s foreign operation and its hedging activities are
considered from 1997-2001. The qualitative research approach was used in it like the
questionnaires should b filled from the non financial Swedish firms those are listed on the
Stockholm Stock Exchange. To calculate firm value Tobin Q method is used and the statistical
analysis are used in it .This study found that the firm value would be effected by the
geographical diversification, its net exposure, and hedging activity of the firms. It was also found
that the firm value which seemed to be positive always affected by the firm hedging decisions.
These results suggest that the firm’s value was affected by the international hedging, global
diversification and firm’s financial positions in the foreign currencies. It was concluded that the
net position of the firm in the foreign currencies have a huge and direct impact on the value of
firm. Companies which have long or short financial positions have an average or high or low
firm value. In this study it was considered that the Swedish currency depreciated substantially
and more of time it becomes stable which may improve its foreign currency value the
competition position and the net present value and also the net cash flow of the Swedish firms
that have a higher value in foreign currencies so there was a positive relationship should exist
among the high value of Swedish currency and its international hedging , international
diversification and the Swedish firms market value . the result also suggest that the geographical
and diversified firms and the big international hedgers are values always at premium .These
factors were very important for the firms because the firms which are engage in international
operations like in international hedging and geographical diversification could increased their
profitability and also have a higher valued then the firms which only works at on its local level or
at national level.

Allayannis and Weston (2001) studied what are the effects on market value of firm if firms used
foreign currency derivatives. This study examine that the usage of foreign currencies derivatives
by the non financial firms of U.S. And for that purpose the data consist of 720 non financial
firms were taken from the period between1990 to 1995 .Objective of this study was to examine
potential impact of foreign currency derivative on the large size USA non financial firm’s value.
it is also considered that derivative usage was directly linked with the high market value of firms
which are calculated by the help of Tobin Q .This study examine that the firms which use the
foreign currency derivative are always get big rewards by the investors or these firms can be
easily captured a huge investors attention towards their business which are totally hedged by the
foreign currency derivative. The control variables of derivative like size, profitability liquidity
growth of the firms are also connected with the usage of foreign currency derivatives.
Conclusion of study was firms which starts its hedging policy experiences a huge increase in its
firm value against those firms which were not in the favor to use the derivative or foreign
currency derivative in its firms as a measure of hedging .And that firms which were not to be
interested to use the foreign currency derivative should have to face the issue of decrease in the
value of that firm which are not faced by the firms which use derivative as measure of their risk
hedging. This study also found evidence that the use of derivative or hedging can cause in the
direct increase of its value of companies

Carter et al (2006) argued does hedging was affected by the firm value and there was also
evidence from the US airline industry. Objective of this study was to discover the hedging
behavior of the firms also that these hedging behavior have some impact on their firm value. By
that purpose the sample is selected from the period 1992-2003. The empirical research model
and different statistical techniques were used in it like statistical models; Tobin Q is measured
for valuation etc. The coefficient of hedging variable in the analysis of regression concluded that
the hedging premium is 5% more than the documentation and 10% increased than the
documented value. It was concluded that the there should be positive relationship exists among
hedging and value in capital invested and premium of hedging were most connected with the
investment of the business. The results shows that basic benefits of hedging in jet fuel by airline
industry which comes if firm’s cuts underinvestment costs. It was suggested that the airlines
employees jet fuel hedging traded at a premium, it was concluded that the firm was positively
connected with the firm hedging value. The increase in hedging also brings some increase in
investment in capital and this connection provides a broad majority concept of hedging premium
of the firm.

Jan Barton(2001)This paper investigated that the earning management decisions and the different
accounting methods used by the firm had the greater impact on the overall decision of the
management .Because the cash flows and the accrual management concern was interrelated
which was effected the managers financial repoting decisions. Our sample was consists on the
non financial and the non regulated firms and the data was from the year of 1994 to the
1996.Overall the data is based upon the 304 firms in which the total 218 are the derivatives users
and the other 86 were the non derivatives users .The jones (1991) accruals model was used to
examined the results which measured the earning before the extraordinary items and the
discounted operations were less from the operation cash flows. Where the TA showed the total
assets of the firms and the AREC was the account receivables. The results showed that the
mangers mostly trade off the derivatives at the margin and also controlling for the smooth
earning from the firm profits .The firm used to large level of the notional amounts had the lower
level of discretionary accruals.

López-de-Silanes & Chong (2006) the aim of the study was to examined the evolution of the
market which was capital market and their effect on the external financing at the Mexico in the
last decades. On the other hand the connection between the shareholders, corporate governance
and company value was examined which showed that the corporate governance increased the
value of the company and interest of shareholder value in the dividend distributions. There are 5
outcome variables are used in this context .The valuation measure of the firm which was
calculated through Tobin’s Q .By applying this model and price to book ratio we examined that
the values reached between the 2.2 and the 2.5 respectively. The ROA and ROE were also used
to measure the overall firm value with the contact to cooperative governance. The data on
cooperative governance scores and mostly related to the stock prices and the financial statement
data of the Canadian companies were utilized. The firm value was calculated by the calculations
of ROA, ROE, and market to book ratio and through the Tobin q model again. The results were
finalized with the conclusion that the capital markets of the Canada and the report on the
business corporate governance have no link value of firm.

Rachinsky & Black (2003) the aim of the study was to analyzed the statistically positive
connection among. The data for the purpose of the research was gathered from the Russian firms
which are listed in the Russian stock exchanged and the data is based on the yearly bases from
2001 to the 2005.The study also include the six different indices which were used by the
Russians firms while examined the importance of the corporate governance. The Tobin q model
is used with the measurement of the sales ratio, market ratio, and the market to book ratio.
Results show that the casually there was positive correlation between the firms level cooperative
governance and the firm market value.

Bonder et al (2001) give the comprehensive inquiry of firms that used derivatives. The main
objective of this study was making such type of database that was suitable for risk management
of firms. The data that was taken in this study is based on US non financial firms. Total data was
base on 530 firms that were taken over 40 industries of US. In this study data was divided into
two groups these were large firms and small firms. Large firms were those firms whose market
value above $250 million and small firms were those firms whose value of market below $50
million. As firm size was associated with fixed cost that leaded to derivative usage. Small firms
have low exposure of risk because of contract sizes that were standardizes but for large firm
there was high level of risk exposure so for that reason derivatives were much suitable for large
firms with respect to their risk level that specially include foreign exchange. From 530 firms that
include in this study 65% of large firms use derivative in other hands 13% of small firms used
derivative. Model that was applied in this study was based on Tobin’s Q for that annual reports
of non financial firms of US were taken. Although through the use of derivative there was
opportunity for firms to reduce their risk but there was another opportunity for firms for risk-
taking, so by this way complications of overseeing task of financial activities increased in a firm.
As a result this study indicates that in non financial firms there was very less firms that use
derivative. Especially if smaller firms were taken into consideration it was clearly seen through
ratio that in small firm there was very low ratio of derivative users. Mostly derivatives were not
used for speculation but derivatives were used to reduce fluctuation s in cash flows.

Petersen and Thiagarajan (2000) studied that how risk measurement was effected by the use of
derivative and without the use of derivative. Main study was based on concept of measurement
and hedging and its relationship with derivative usages and without derivative usage. In this
study work was done on concept that how firms manage their risk and for that purpose
comparison technique was used. This comparison was based on two firms of gold mining. This
included American Barrick and Homestake Minning. This study was classified firms as
derivative users and non derivative users. It included both effects and characteristics of firms and
risk management. From both of these firms one firm use derivative to hedge its risk and other
firm do not uses derivatives but uses a combination of different decision these were operating
and financial. Sample consists of firm’s data range as 1976-1994 of both firms. Test that was
applied in this study CAPM regression. For CAPM regression taxable income or net cash flow
was taken that were available in annual reports. As a conclusion study finds that derivatives were
useful and firm use derivatives to manage their risk as they were good financial instruments that
manage their risk. In this study firms were taken are totally lie at different spectrum as they
variable with each other in the way that they use financial derivatives of not. Firms vary with
respect to their strategies that included compensation. There was open door facility for managers
who were not risk takers or in other words they were risk averse in respect to range and decision
regarding to hedging.

Hukeri (2007) explicated the function of derivatives and growth of derivatives. In study growth
trend of international exchanges were evaluated. Firstly from national context study showed that
growth pattern rapidly variant it means national stock exchange faces high level of growth in
trading of derivatives. But growth of derivative was dependent on retail demand. Derivative
included two weaknesses firstly in accordance to its structure and secondly in accordance to
investors profile as investors was in limited numbers. These weaknesses leaded towards increase
in other related issues these issues were volatility in equity markets that is sustained, increase in
concentration also. For this study data was taken for 2006 and for this data was taken of five
exchanges with respect to single stock futures contracts traded (NSE) turnover analysis was used
in this study. For concluding this study main point was that derivative market structure need
scope for improvement. One good option in this case was that stock futures should be come to an
end but in fact for vocal trading class it was not a suitable option. For businesses that needs
derivative because their high level of risk involvement in institutions it was important to
increased hedging demand for these institutions. Main reason was that if they use derivative in
their risk management then their value of business increased that leads directly towards success
but if on other hands derivate not used then risk management may tough and hard to handle.

Cummins et al (2001) investigated link between derivatives and corporate risk management. In
this study there was analysis of why firms engage in risk management who wanted to maximize
their value. It provided general support for firms that engaged in risk management practices. This
study was based on general evaluation of firms who use derivatives in their risk management
practices. Data that was taken in this study range as 1994. Data was based on US derivatives
holdings. Main source of data collection was annual statements. For that purpose data comes
from database of annual statements of 1994 these annual reports filed with insurers with NAIC
that was National Association of Insurance Commissioners. For analysis phase hypothesis was
created with regression. Regression equations were estimated to explain decision for firms to
participate in derivatives markets. Regression equation was also used for derivative transactions
and for conditions regarding to participatory decision. This study explained that firms who had
low level of tolerance in regards to risk have more engagement in hedging decisions on other
hand firms whose tolerance level was high with respect to risk have less engagement in decision
related to hedging. But in this study as a results there was clear finding that relationship between
derivative activities volume differ and give opposite results in contrast to those in regression
results. Results showed that there was marginal cost associated with hedging decision as per unit
risk premium was charge on hedging that leaded firms to extra cost for that reason most of firm
who wish to get risk mostly not willing to use derivative main reason was definitely this
marginal cost associated with this hedging.

Stulz (2004) examined different questions related to derivative that what were derivatives? Were
derivatives really having value for firms? This study investigated that do derivatives increase
welfare. Do derivatives threaten firms for beneficial for firms. Data in this study was taken range
as 2000-2001. It consisted of 48 countries of non financial firm’s data. Those were firms listed in
stock exchange of their respected countries. Annual reports of these firms were taken to find out
results. Totally 575 commercial banks were taken from 48 countries. Two types of derivatives
were taken foreign exchange derivatives and interest rate derivatives. Majority data was based on
US firms because in US 64% banks used derivatives. Test applied on this study was based on JP
Morgan theory. So as a result it was stated that derivative allow firms to hedge their risk and give
way to efficiently handle their risk. This study give answer to those who fear derivative in
respect to if they use derivative episodically or those who were not experienced in using
derivative so should they fear derivative or not. This study answered that no they should not fear
all that. There should not be fear of crashing of plans and for that reason refusing risk. As a
conclusion this study explained that plan may safe only due to good economic sense and same
for derivatives if derivatives used for economical sense there may not be danger of loss.
Conclusion was that losses related to derivatives were localized but on other hand derivatives
were beneficial for whole market growth.

Geczy et al (2000) examined very carefully use of currency derivatives. In this study comparison
was made of different theories of hedging behavior. As each theory explain some different fact
regarding to derivatives. Time period of this study was 1991 and for this comparison US
industrial corporations were used. Totally data was based on 500 US industrial corporations that
have highest sale for year 1990. Data source was annual reports of these corporations. And main
test that applied was univariate Tests. In this study there was examination regarding to which
firms use derivatives. Conclusion give picture that firms who have higher opportunities of
growth and strict financial constraints they use currency derivatives. So result says that
derivative played their role in reduction of variation in cash flow that lead firms towards
investment in growth sector or in growth opportunities. Firms who take decision related to costs
and benefits were leading them to use of currency derivatives and give a choice among currency
instruments. So as a result related to these firms in this study says that firms in study used
derivative for hedging not for speculating.

Howton and Perfect (1998) studied the derivative usage. How many firms used derivatives and
ratio with respect to categories of firms? In this study two types of firms taken into
consideration. Samples consist of large firms and small firms. These firms selected randomly.
There was examination on which firms use derivative more than other firms. Area that was taken
for this study was US firms. Time period was 1994 for this study. Main model that was applied
in this study was Tobin’s Q model and for this model data was taken from financial statements of
firms of US. This study that were based on derivative consist of sample of 451 fortune S/P firms
and 461 firms other then 451 FSP firm’s that were selected randomly. So from this sample 61%
of FSP firms and 36% of randomly selected firms that uses derivatives. From this sample
evaluation it was taken that swaps usage was low in interest rate contracts and future and forward
contract usage was low in currency contract. As this study based on old work on this area so as a
result of this study conclusion based on the concept that if FSP firms considered then these firms
use derivatives to avoid too much cost that they faced. This study get more and more importance
in literature because it’s based on past research and US firms use derivatives that leads to
continuous growth. So as a conclusion there was difference of results and usage of derivatives in
both categories as FSP and randomly selected firms. Their theoretical usage differs in both cases.
For future research these was recommendation of work on this difference that occurs in both
categories.

Mackay and Moeller (2007) investigated what was corporate risk and how corporate risk
managed. This study showed that how vale of firms increased through the risk management in
case where cost and revenues related with price. In this study regression model was used in way
that regressing firm sales and cost on quarterly basis and price level in respect to high and low.
Time period taken in this study ranged from 1985-2004. Sample consists of 34 oil refiners. Main
finding of this study was hedging relates itself towards revenue, leaving relates itself towards
costs that was exposed each one of these represent 2% and 3% of firm value. Main model that
was applied in this study was Tobin’s Q to find out firm value and risk management level. There
were consistent results with this model. Hedging add up firm value when there were enough
costs faced by firm mean progressive taxation and bankruptcy cost. There were positive
relationship found between hedging rates and derivative usage measurement rates. Results
showed that hedging activities inferred from firms data. Footnote data was used in this study
from annual reports of firms. So conclusion based on fact that risk management was effected for
firm’s value and their performance as compare to those firms that have no link with risk
management.

Masry (2006) examined how derivatives used in risk managements. Derivative was
implementation in markets. This study was done on UK market. Data range between March and
May 2001. In this study non financial firms of UK were taken. Total data in this study was based
on 401 firms. For this study results was taken from mailing questionnaire survey. Basic objective
was to find out causes which lead to use of derivatives or not by nonfinancial companies of USA.
This study was based on different groups with respect to their size that link with fixed cost.
There were three sizes taken in this study small, medium and large. Small firms was those whose
turnover less than £50 million. Medium firms had turnover more than £50 million but less than
£250 million and large firms had turnover more than £250 million. Results from this study
explained that derivative usage ratio was high in larger firms and derivative usage ratio was low
in both medium and low firms. Same like that derivative usage ratio was high in public
companies as compare to private companies. There were results that mostly firm have less
exposures in derivative usage percentage of these firms been 75%. Mostly firm that used
derivative used option and this was done through forwards, futures and swaps also. Future
research can improve the research related to understanding of derivative usage.

Freeman et al (2006) examined very carefully credit risk management. In this article derivative
usage was defined in risk management practices. In this article credit derivative used by
corporation defined in brief way. Time span of this study was 2004 data. This paper was based
upon two type of literature and this literature related to credit derivatives and their application in
risk management. One literature was of academic nature and other literature was of practitioner
in nature. There were some simple numerical calculation were made in this study with examples.
These examples were related to uses of derivatives in different circumstances. These
circumstances lead towards use of credit default swaps and total return swaps. This study
examined different simple and practical ways in which derivatives used to manage risk. Strength
and weaknesses of these ways also examine in this study. As a conclusion of this study it defined
that derivatives that were of company level provides low cost, different and more traditional
products insurance also. From result it had seen that most of insurance companies engaged in
derivative usage activities. For further research there was recommendation to research more on
this area that related to impacts and its advantages. Further research must be done on credit
derivative advantages and usage.

Nguyen and Faff (2010) explicated the relationship between financial derivative usage and firm
risk. How firm risk linkup with derivative usage. For that purpose firm was taken Australian
firms. Data range was from 1999-2000. Data was based on 500 largest Australian firms and
these firms include only listed firm in Australian stock exchange. Ratio that was used in this
study was market to book value ratio. There were annual reports used to collect information
regarding firms as derivative users and non users. Different risk measures were used in this study
that includes total risk and systematic risk. Portfolio that was used in this study was univariate
portfolio with fixed effects model. Results show correlation between firm risk and derivative
usage and this relationship was nonlinear in its nature. Moderate derivate user’s gives there point
of view that derivative uses lead to risk reduction. Public concerns with derivative uses to secure
themselves from moderate risk. Further research recommendation were given in this study was
that hedging motive of derivatives were discuss in detail but speculative motive needs more work
to be done. In accordance with Australian corporation as there was low use of derivatives as
speculation purpose so there was needed to work in speculation motive of derivative other then
hedging motive.

Mariathasan (2000) investigated how insurance firms use derivative instruments? As only one
sector was taken in this study that was insurance sector only. This study was based on data of
UK based insurance companies. Data range time period was of 1996. The technique that was
used for collection of data was mail questionnaire technique. Data was basically extracted from
annual reports. Mail questionnaire technique based on data that how many companies used
derivatives. What were main advantage companies takes after use of derivatives. Different form
of derivative was discussed in this study. Forwards and future contracts were proved to be most
accurate and useful derivatives types according to this study. Option based strategies can be
essential for retail products production. So according to this study options were not suitable for
day-to-day funds activities. For investment bankers and for brokers there was an option to
maximize their performance and effectiveness if they have better understanding of derivative
users and they have views related to such institutions. For beneficial business investment sector
can gain knowledge from all these firms so as conclusion derivatives have befits for insurance
companies

Khediri (2010) studied and investigated valuation effect of derivative usage. Market that was
taken in this study was French market firms. Time period for this study was 2000-2002. Sample
consists of 250 non financial firms of French market. There were linear regression framework
techniques and panel data was used in this study. Model that was used in this study was Tobin’s
Q and this model was used to find out market value of the firm. Reason of this study was to find
out derivative effects on firm value. Main finding related to this study was that the decision
regarding to derivative usage has no effects on firm value. However in actual there was
association between derivative usage and firm value but very low. So according to this study
French investors do not give premium on derivative value because low association. In
accordance with all these facts results was his relationship was not statistically significant in
many cases. There was further recommendation related to French firms that they needed to
search on issue that why derivative usage had values at discount. So it must need to extend work
further on correlation between derivative usage and value of firm.

Khan and Abbas (2013) examined systematic risk. There was first work on single stock futures
was done in this study. This research was based on data of Pakistani markets. Time period for
this study was taken from 1st July 1999 to 31st December 2009. Two market conditions were
taken in this study bull and bear markets. The data was taken from annual reports of Pakistani
firm that were listed in Karachi stock exchange. Basic model that applied in this paper was
CAPM i.e. Capital asset pricing model use for estimation. There was evidence related to
decreasing trend in systematic risk. Main finding of this study was that systematic loss for single
stock future might not effected by introduction of trading in SSFs but on other hands it effect
overall market or industry. This change can easily see in systematic risk of SSFs by way of
model. From results of this study and reference to US market it was showed that there was
declining trend. There may be further scope for work in future on SSFs and systematic risk.

Sprcic (2007) inquired the practices of financial risk and usage of derivatives. This paper showed
the use of derivative for risk management. Data was taken at time of 2005. 400 companies that
were taken find out link between derivative usage and risk management in firms. Croatian and
Slovian non financial companies were taken to find out their decision related to risk practices
and derivative usage. Derivative worked as risk management tool. Data for model and test was
taken from annual reports on these firms. OLS regression was used to find out purpose of
derivative usage. There was comparison of two firms taken as which firm used more risk
management practices. As a conclusion it was found that Slovenian firms have more practices
related to risk management as compare to Croatian firms whose risk management practices were
low. Both companies focus was forwards and swaps. So as a conclusion it was stated that swaps
and forwards gain more importance in both of these two companies.

Arzac (2011) examined the usage of equity derivatives. This study was based on results for the
year December 1994. Firms that were taken in this study were UK firms. Optimal takeover bid
was used for this evaluation and for that H-T model was applied. This paper was based on
benefits of derivatives. As derivatives usage may not increase the cost. Its benefits included
regulation, efficiency of economy and benefits that relates to social welfare overall. So as a result
it was stated that equity derivatives add value and facilitates potential in the growth of firm. This
included those firms that used competing bids. So in response of all this society must determines
the benefits related to tenders that lead to automatically increase in derivative usage. So as a
result it was shown in this study that equity derivatives have their benefits for the development of
economy and for development of firm’s value and its growth. So in this respect there was
positive relationship of equity derivatives and firm growth its efficiency and overall social
welfare.

Lin et al (2009) investigated the effects of corporate derivatives. Data was range as 1995-1996
for this study. This study was done on firms of US. There were 150 firms taken that were merger
and acquisitions only. So basically this study was undertaken to find out effects of derivatives on
M&As. Data was taken from annual reports of these firms. Then buy and hold abnormal returns
(BHARs) were computed. There was positive results found in response to this study that there
was positive relationship with acquiring firm’s performance. A derivative user performance was
outstanding on other hands nonusers perform was worst. Then there was another link showed in
this study when there was higher information them firms gain advantage through the usage of
derivatives. New evidences regarding to risk management and firm performance was provided.
So as a conclusion it was stated that derivatives has benefits for post mergers performance. It
gives future research on market valuation corporate level activities.

Lien and Zhang (2008) studied and investigated the empirical and theoretical work on derivative
markets. This paper also explains about policy implication and regulation regarding to derivative
markets. Data range as 2000 in which market survey was taken. Mail questionnaire technique
was used to find out results related to derivative markets. Further data that was needed for model
was taken from annual report of firms that was taken as sample data. As from this paper it was
stated that derivative market get growth day by day. But more development in derivative market
in emerging economy needs to be supported as policies and regulation in this regards must need
change. Derivative markets had hedging role in economy. There were implementation of hedging
ratio was explain but further improvement was needed as recommendation in this study.

Aragon and Martin (2013) examined that hedging related decisions. This study was based on
decisions related to equity and equity options related to hedging. This work was also related to
hedge fund investment advisors equity option position. Data range from 1999-2006. Price to sale
ratio was used in this study. Different test were applied in this study these includes Volatility
timing tests, Grinblatt and Titman Portfolio performance benchmarks test. From these test result
find that hedge funds stock position predict future returns and option positions predict volatility
and return on underlying stock. There were two types of managerial ability found in this study.
This ability relates to options holdings. So as a conclusion this study reveals that option markets
as a good tool for information exploit by managers. These result leads to importance of hedging
practices.

Mallin et al (2001) studied use of derivatives with reference to UK nonfinancial firms. Objective
was to analyze what were the main reasons, types. factors, and methods of derivatives usage. For
research they conducted a postal survey of management related to risk practices and derivatives
by USA non financial corporation. There were 231 respondents and questionnaire surveys
conducted. Survey showed that 70% of firms had some kind of documented policy related to
derivative usage. Company size played vital role in explaining difference in formality. Larger
firms used different valuation model for derivatives. And half of the firms in survey do not used
any model for evaluation of their derivative portfolio. The results of this paper showed that 60%
of UK companies used at least one derivative instruments only 30% companies had turnover
£10m who used derivatives. And size of the firm also affects derivative usage.
Dolde and Mishra (2007) studied that foreign exchange derivative use and firm complexity. The
purpose of study was to test degree of information asymmetry and six other important theories of
foreign exchange derivatives use. The data for this study represented a 100% sample of all US
nonfinancial firms with approximately sales of $1 billion or more with records in both the
Compustat and Dis-closure databases. The period of study was October 1995 to September
1996.They observed both qualitative and quantitative measures behavior of Foreign exchange
derivatives. Structural equations modeling were used. The findings of this paper showed that
more complex firms hedge more. The results indicated that managerial ownership, complexity,
primitive risk and financial distress related to hedging behavior. This paper provided extension to
future research most of the work done on pre-hedging foreign exposure , disaggregating extent of
hedging by matching the currency hedge with exposure.
Naor (2006) studied the importance of financial derivatives in economics and law perspectives.
Objective of paper was to analysis the purchased of financial derivatives to hedge risk. They
used different accounting standards for analysis. The findings of this paper showed that hedging
provides opportunities for division of labour. A manager managed operational operation of firms
without having knowledge of financial risk and underlying assets such as currency and
commodities he cannot be successful. The results of this paper indicated that hedging is the
backbone of corporate governance mechanism and managers would be compensated, evaluated
and judged on the bases of their actions and not on the basis of financial risks because they
cannot have such kind of knowledge and control.
Brown and Toft (2002) studied the main reasons that why firms use hedging practices. The goal
of this paper was to find out reasons for hedging and also provided strategies for maximizing the
value of firm. The main aims of value maximizing were exposed the firms to quantity risk,
expand the hedged contracts like options and customs derivatives and permit production
technology to enter into hedged contracts. The sample consisted of 100 firms. According to the
findings of this paper correlation between price and quantity, fluctuation of marketable good’s
price ,fluctuation of quantity of that’s goods effects optimal hedge. The results showed that firms
benefited from buying options that had negative correlation of price and quantity and firms
benefited from selling options that had positive correlation of price and quantity. This model had
specific implications of nonlinear hedging strategies. For future research would be based on how
empirical distributions change the firm's optimal choice of hedging instrument.
Gniewosza et al (2001) studied hedging effectiveness and importance according to auditor’s
point of views. This study examined the policies and practices with respect to auditing
approaches of Big 6 firms in Australia where hedge accounting was a big issue. Big 6 firms was
selected for this study because their policies and auditing approaches adopted for hedge
accounting overview of international practices. A structured questionnaire was used for data
collection that summarized the policies and practices recommended by Big 6 firms. These
questions were then supplemented with information provided by the firms on the audit approach
undertaken on recent specific audits where hedge accounting was an issue. The findings of this
paper showed that audit procedures associated with hedge accounting were dependent on two
factors if actual situation is different that auditors faced and if auditor’s judgments differ in case
of individual situations. This paper suggested that effectiveness of hedging also test by measure
of inverse correlation between hedging instruments and position being hedged.
Chaudhry et al (2014) and investigate in case of non financials firms in Pakistan what are the
determinants of derivatives usage and corporate hedging in risk management. The objective of
this study was to examine the in risk management what was the determinants of corporate
hedging policies and derivative usage in Pakistani context. Data consisted of 75 non financial
firms listed in Karachi stock exchange (KSE). The period of study was 2007-2011.The study had
used secondary data. A semi-log model was used to identify difference between users and non
users of derivatives to check their characteristics. Ordinary Least Square (OLS) was applied
extract the hypothesis results. The findings of this showed that active users of the derivative
users were those firms that had growth opportunities and purchased volume. Their findings
confirmed factors that positively affected hedging practice of Malaysian firms as reported by
Ameer (2010). Other specific factors like cash flow volatility, size and growth options of firm
had strong influenced on derivatives use. According to the results of this paper there is strong
relationship between firm’s growth options, size, liquidity and foreign purchase and derivatives
usage. This study provided future extension to research those other factors excluding growth
options. Cash flow fluctuations and size must be considered in future. And research on
implementation and strategies related to derivatives would be affected in future.
Dams et al (2007) studied if industry equilibrium exists in economy then what was the role of
hedging, competition and financial constraints. The focus was to examine the hedging decisions
of firms within in equilibrium and to what extent firms hedging choices dependent on the
hedging choices the competitors and also analyzed hedging decisions of companies. They
developed model in spirit of Froot, Scharfstein, and Stein (1993) (henceforth, FSS).FSS assumed
that internal funds were cheaper than external funds. So this paper research considered that firms
rely identically on funds that are earned from internal sources for financing their investment..
Analysis suggested that when industry shows more inelastic demand, more competition and less
production costs there must be a more changes in hedging choices. The results showed in
competition 50% firms used derivative instruments and 50% do not.
Brunzella et al (2011) studied the usage of derivatives Instruments in Nordic firms. The purpose
of this was to examine determinants of risk taking, opposite, firm level diversification for
derivative use. They selected four Nordic countries and study the difference between firms in a
Euro zone country which includes Finland, with potentially less effective reasons to hedge
exchange rate risk and interest rate risk and firms in Sweden, Denmark, or Iceland. They also
included the comparison between the financial derivative firms and non financial derivative
firms. The survey was conducted through questionnaire and these questionnaires were sent to all
chief financial officers of firms listed at Nordic OMX Exchanges. The respondent rate was
18.92%, range was 9.1% for Iceland to 24.2% for Sweden. According to the findings there was a
negative correlation exist between the firm level diversification and hedging, On the other hand
there was a significant positive correlation among derivative and hedging. The motive of
financial firms was to use derivatives to earn profit not for speculation. And derivative usage had
less effect on firm value increasing trend.
Lima and Wang (2007) studied the impact of financial hedging on corporate diversification and
the role of stakeholder firm specific investments. Benefits of financial hedging reduce risk with
the used of swaps, forward, futures and options. On the other hand benefits of corporate
diversification included reduced firm level risk. The main purpose of this paper was to analyze
the difference and synergy between these two risk management mechanisms. They investigated
the two main question first was when shareholders could manage risk at their own cost direct
relation exist between firm value and business risk. Second, what was the correlation between
financial hedging and corporate diversification if reducing risk indeed increased firm value were
they necessary or optional? The model introduced value of firm and stakeholder’s investment
model. The results showed that corporate diversification and hedging contracts were not
important in hedging different types of risk. The future research would examine the association
between the different methods of risk management.
Koziol (2014) made a survey and investigated the interest and inflation derivatives with the
context to foreign risk management. The main focus of our study was to analyze the hedging
polices that were intended to improve the performance of foreign risk by hedging the interest rate
derivatives. It was considered that the use of more hedging instrument foreign hedging can also
improve the performance of foreign hedging in the real term value. purpose study was to
examine that how firm facing the issue of product price, cost and the exchange risk price can be
enhance its exchange rate risk management. The value added risk was used in that study to
investigate the foreign exchange risk. Focus of research was to investigate the hedging
instrument beyond the foreign risk forward contracts. Results of study help the firms to make the
design of the foreign strategies. The paper found that the additional instruments of the foreign
risk derivatives are mostly dependent on the hedging horizon of the firms. Inflation rate
derivative should be useful for short term hedging polices but the interest rate derivatives were
very useful for the long term hedging polices. These results should be easily used for the hedging
strategies. Those firms which faced the revenue and the cost risk in their business and also used
the exchange rate risk these could be easily improved its foreign risk management by the help of
standard forward risk management.

Makar and Huffman (2001) studied on the Foreign exchange derivatives, exchange rate
volatility, and firm value in the USA multinationals which used of short-term financial
instruments to mitigate the currency risk. This study was conducted on the multinational
company which makes some changes in their foreign currency exchange risk relative with the
usage of their foreign currency derivative. Focus of study was basically to find out the
relationship of multinational companies which mostly worked with the foreign currency
derivatives and also found that the value of firm would be change with the usage of foreign
currency derivatives. It is concluded firms value affected by the use of foreign exchange rate
fluctuations in the period of short term for the multinational U.S companies. The sample was
taken of 166 companies and the data was collected from the period 1989-1993. The entire
amount and the value of foreign currency derivative should be taken from the firm’s financial
reports. Regression model and hypothesis testing was used for that study. That study was
empirically examined value of foreign exchange rate risk makes a bridge between the changes of
firm value and the changes in exchange rate. The main finding of that study was that the
companies of lagged firm value was effected by the exchange rate and also considered that the
firms which use less value of foreign currency derivative related to their foreign sales have low
rate of foreign currency derivatives and also have low firm value than others firms which used
the foreign currency derivatives at premium. However those results show that the differences of
cross sectional in the magnitude of the currency exposure were negatively related to the use of
foreign currency derivative. Additionally it is considered that the multiple exchange rate risk
changed and the both size of firm and the foreign firm attachment puts a huge impact on the firm
value and also on their foreign hedging strategies.

Berkman et al (1997) studied on the international comparison of derivative use. Objective was to
describe the use of derivative by the New Zealand firms and compare those results from the
survey of U.S firms. There the main issue was addressed that the derivative use is the primary
and sophisticated instruments of U.S firms. That research was based on the qualitative mode of
study in which the questionnaire was used to collect the data from the 124 listed companies of
New Zealand stock exchange. Those companies used different type of software for their hedging
activities like derivative hedging. In New Zealand the firms mostly relay on their own vendors
they are not some much interested from the work of outsider vendors of the world. As compared
with the U.S firms those firms used the commercially available spread sheet and also used their
own software for hedging purposes. The main focus was that the New Zealand is a developing
economy with less developed financial infrastructure but the main focus was that mostly all the
firms of New Zealand used derivative for their hedging purpose. This huge volume of derivative
use shows the increase in transaction cost reflects the higher risk exposure of New Zealand. The
study found that the New Zealand firms mostly report to their directors the current position of
their derivative instrument and that was not done by the U.S firms. The results was concluded
that the as compared with the U.S firms the New Zealand firms was playing an active role while
using the derivative instrument and they also had a very attractive reporting system. But the
similar point between both the U.S firms and the New Zealand firms was that the main objective
of the financial risk management by the help of derivative hedging and its strategies.

Koski and Pontiff (1999) made a survey and investigate that how derivatives were used from the
industry of Mutual Fund. The main objective of that study was to find out the derivatives usage
by mutual funds to compare the return attributes of those mutual funds that was the big users of
derivatives and compared with those mutual funds that don’t use derivative. In that study the
portfolio analysis was made because the ability to trade the derivatives was likely to affect the
management decisions as compared to that firms which used no derivative in their business. For
that purpose the sample was collected from the period 1994-1995. That paper provides us the
different ways by which the managers of mutual fund use derivatives. Almost the 21% of sample
of equity mutual fund used derivative. Derivative becomes a member of the financial instrument
family of funds. The managers who decided to use the derivative instrument for their hedging
purpose combine their assets of derivative users and non users of derivative to make a balance
between the portfolio return with compared to that that don’t used derivative. Those finding are
such as different from the popular association of hedging like derivative use for risk exposure. It
is also concluded that the firms which used derivative funds have the similar performance with
those firms which were non user of derivative. The results showed that the firms which used
derivatives have high value as compare to those firms which were not used the derivative for
their hedging purposes. By the use of derivative it brought some kind of changes in the
systematic risk but there would be no changes were be made in the idiosyncratic risk. This study
also showed that the implications of cash flow and the management gaming for the relationship
among the firm risk and the firm performance.

Gay and Nam (1998) studied on use of corporate derivatives and problem of underinvestment.
The primary focus of that study was one of the less exposed hypotheses by the help of hedging.
In that study it is analyzed that the underinvestment issue of hedging policy. The sample is taken
from the period of 1996 of 1000 listed U.S firms. By that purpose different type of statistical
models are used and the Tobin Q were also used to calculate the value of the firm. It was
considered that the different proxies for the firm investment opportunities were settled by the use
of derivative. When the firms have low level of cash and investments then they can be easily
settled some opportunities for their derivative use. And the main finding of that study was that
the internally generated cash flow and the outlay of investment were influences by the firm
ability to derivative use. Those finding should be said that there are negative relationship should
be exist among the derivative use and the relation between the cash flow of firm and the firm
investment level. This supports an issue that the firm has higher correlation have much power to
make hedging more strongly. The results shows that they could be used derivative as some of
one strategy to maximize the shareholder worth. Overall those results show that the use of
derivative may be a useful tool for a firm to avoid the issues of underinvestment.

Howton and Steven (1998) studied the case of USA firms with context to currency and interest
rate derivatives. Purpose of study was to make the pattern and the determinant of derivative users
by collecting the sample of small, large U.S firms and that firms were selected randomly. It was
also described that the determinants of derivative use. From the selected sample totally 36% of
firms used derivative. Swaps are often used for interest rate contract and the for currency rate
contract mostly forward, future contracts are used. One finding shows that he randomly selected
firms and the theoretical determinants were not strongly connected with each others. The value
of derivative use should be taken from the annual reports of the firms. Those results were gives a
great and huge support towards the previous results study that the FSP firms mostly used
derivatives for the purpose of reducing its cost. Those finding would be helpful for the arguments
of previous studies and also shows that the U.S firms were the big users of derivative and used
derivative for their hedging purpose and to reduce its cost. Other implication of that research was
the use of derivative in non random firms of the U.S large companies were strongly related to the
theoretical practices of derivative use. The future study would be leads toward the sources of
such derivative users.

Bartram et al (2009) made a survey and investigate about the international evidence on
financial derivative use. The basic objective of that study was to predict about the non financial
firms which use derivative and they were also have a low transaction cost, investment related to
cash flow and also resolves the major conflicts among the owners and managers. The main
purpose of that study was to gives some light towards that factors which would be the motivators
of the derivative users by some major companies. The sample for that study was taken from the
period of 2000-2001.by that purpose the regression model, dummy variable and statistical
models were used. To calculate the above mentioned theories have small power to explain the
coefficient of derivative use. Like the derivative use helps us to determine the level of the debts,
dividend policy, the holding of liquid assets and also the international hedging. That results
shows that the derivative usage becomes more useful and fruitful for those following factors like
the maturity of firm debts, its liquidity, its profitability and also other hedging financial
instruments. This conclusion gives us a direction towards the use of derivative for growing
economy to overcome the downturns for that growing economy. The impact of that study was
reinforced by the other studies of others firms which were associated with the strong economy of
the world and those also have the higher financial risk and they also preferred to hedge more
than the others growing firms and it’s as alternative in the fast developed economy.

Dolde and. Mishra (2007) studied about the Complexity of firm and foreign exchange
derivatives Use. The main purpose of that study was to found the two main interest points in that
study which are the firm complexity and the second one is foreign derivative use. The data was
taken from the 100 non financial U.S firms from the period 1995-1996. All the data would be
taken from the financial foot notes of the company’s financial reports. Results analyzed that the
more complex firms were more interested to hedge in derivative instruments. Those results found
that the managerial interest and financial distress was the main source of measuring the hedging
instruments. Those results were not supported by the role of underinvestment scale and their
positions. The data set of that study was comprises of the 100 U.S firms which sales were exceed
from 1 billion. Those results are found in that study like the complexity of the firm its managerial
structure its ownership design and its financial misbalance could be leads towards hedging
behavior. It was also concluded that the hedging positions would be works in such a balance
manner if the shareholders have a full and balance information about the financial and the
managerial issue of the firms. If all the information is well know by the shareholders then the
hedging position was much excellent and better for the working of the firms.

Guaya and Kothari (2003) made a survey and to investigate the following that to extend
how much do firms hedge with derivatives. Main purpose of that study was to provide evidence
about the financial risk derivatives and to compare the magnitude of the risk that the hedging
predicts are potentially and costly. To explain the magnitude of the firm derivative portfolio were
likely to explain the empirical literature on derivatives. For that purpose the data of derivative
would be collected from the financial reports of the firms. That paper shows a brief concept
about the importance of derivative that the financial derivatives perform a bit important role for
the development of the economy. For the selected sample of 234 non financial companies using
derivatives it would be reported to their risk hedging for financial derivatives. If interest rates
and the currency rates changes then the three deviations then the median of the firm derivative
portfolio also changed and generates 15 billion in cash and 31 billion in value in that selected
sample companies. Those figures shows a very significant behavior of derivative that to rethink
about the previous research documented the new one shows the importance of derivative use.
The results suggested that magnitude of derivative instruments position held by the small
companies with compared to their risk level. Those are the following main issues associated with
the use of derivative that are as follows derivatives usage towards fine tune towards the risk
management and mostly used for evaluation purposes, use of decentralized methods of decisions
for derivative use for the internal performance of the companies.

Kim et al (2008) studied on the impact of managerial bonus plans on corporate use of
derivatives. The main objective of that study was to obtain the results from the effects of
managerial bonus plans on the company’s policy of derivative use. The sample of that study
consists of non financial firms from the period 1992-1996. The results found that there were
negative relationship must exist among the derivative use by the firm and its CEO compensation
plans which are in the form of bonus. Those results show that opposing incentives tends to set off
in cross sectional firms. It was concluded that incentives in managerial plans plays a very vital
role in the explanation of corporate derivative usage as a policy predictor. To empirically found
the relationship between bonuses based incentive and also necessary to determine the payoff
functions of the firm.

Guay (1999) studied the effects of derivatives on firm risk. Study show empirical examination
of new derivative users. Main focus of that study was to examine the functions of derivative in
the firms where derivative have starting role. That study was basically based on the two main
pillars one was to examine the new users of derivative and the second was the combine multiple
approach where the derivative have an attractive power of hedging. The results were found
consistent with those companies who use derivative for hedging purpose. These finding
emphasize the basic importance of hedging accounting standards and the impact of derivatives
on its own firms. It was concluded that the reduction in the transaction hedging standards of the
companies allow the firm to qualify for hedging even they can’t use derivatives. It would also be
considered that the use of derivative for speculation purposes would not be same for all of the
firms. To identifying the characteristic that was connected with the different forms of hedging
polices can assist some standard settled in hedging rules that directs firms to reflect the
economics implications of their hedging polices.

Lin et al (2007) made a survey and investigate the impact of corporate usage of derivatives and
increase in value of diversification. The main focus of that study was to build a connection
between the cooperative derivatives and the diversification discounts. For that purpose the data
was taken from database of non financial firms for the period of 1992-1996. It was considered
that if the discount diversification was associated with the asymmetric information then the use
of hedging instrument would reduce the discount of diversification. Those results found in that
study was the large number of diversified firms rationally collect the asymmetric information
and also reduce the negative value of diversification. It was found that the derivative users
showed a significant discount while the others were not. That paper also shows that additional
insight of firm risk management practices risk management activities. Future finding was
connected to eliminate the negative effects of valuation large size diversified firms use
derivatives.

Hodder and Jackwerth (2011) studied the managerial responses to incentives and the control of
firm risk, derivative pricing implications, and outside wealth management. The basic purpose
was calculating the value of derivative securities on a controlled process according to market
conditions using the risk as a neutral. According to that study the manger’s optimal control at a
company, value of derivative should be calculated easily according to market situations. For that
purpose it is compulsory to calculate value according to market conditions. In additional the
managers observed the control behavior very endogenously which leads to market empirical
observations. That value represents us the small portion of the empirical evidence of that model.
It was concluded that model strongly suggested only for employee the influence on the firm
value process. By the help of those strategies we can easily measure the market value of
derivatives by the use of neutral pricing procedure. Those were the min methods for calculating
the derivative for the firm value.
 Hentschel et al (2014) investigate the risks related to insurance industry who use derivatives.
The main focus of that article is to calculate the derivative holding of insurers of U.S to analyze
the hypothesis that the large firms were mostly connected in the hedging process. That research
provides us brief and new evidence that use of derivative for corporate risk management by
investigating the issues which affects the usage of derivatives in the USA insurance industry.
The sample was taken from the period of 1994. The writers were much interested that the
insurance industry were much interested and motivated towards the financial derivative usage
and by which the expected cost would be decreased and that decision the use of derivative was
inversely related with the capital to asset ratio. There were the following results were conducted
that the insurance companies use derivatives to hedge their liquidity, assets volatility and risk
management. It was examined that insurer had high asset risk use the high rate of derivative.
Sometimes the states impose some regulations on the use of derivative. Restricting derivatives
could be increased firm for the insurer who was the new comers of derivative user of market.
And it would also decrease the ability of other insurer to assess that risk management policies.

Hentschel and Kothari (2001) studied that how corporations reduce and take risk with
derivatives. The main objective of that study was to investigate the derivative use at corporate
level was highly related to the prices of stock and risk. Such type was study becomes more
important the firms which use derivative to increase the risk recently have a guidance regulatory
agencies in their consideration of hedging polices and derivative users. The sample was selected
from the non financial firms between the periods of 1988. That paper shows that big USA firms
are actively participates in the derivative markets. However there were some restrictions also
impose on the usage of derivative by the USA accounting standards. The results were
empirically shows that the academic studies of corporate derivative used taken it from granting
that firms which hedge with the help of derivative. Those results found that firms systematically
reduce or enhance the risks of the firm with the help of derivative. It was concluded that most of
the firms mange their risk exposure with the help of derivative. That finding had clear future
implications for the ongoing regulatory debate. Some regulators thinks that value of derivative
was depends upon the whether the derivative used for hedging or for the speculations purpose.

Barton (2001) made a survey and investigate that does use of financial derivatives affects
earning management decisions. The main focus of that research was to find a no relationship
between derivatives. To calculate managerial incentive, level of earnings volatility was measured
by the help of hedging and accrual management with the help of derivatives. The sample was
included of 500 firms from the period of 1994-1996. Those results show that mangers appear to
trade off the derivatives. That’s why after the controlling of smooth earning firms holds
derivative portfolio with large amount. It was considered that magnitude of large amount is
endogenous and results shows that decisions of manage risk and also firm earning. Those
empirical results show that mangers always ready to trade off of derivative and discretionary
accruals at a margin rate.

Javed and Iqbal (2006) studied on corporate governance and firm performance evidence from
Karachi stock exchange. Main objective of that research was to examine the correlation between
the corporate governance and firm value for the firms which were publically listed at Karachi
stock exchange. The data was collected from the company’s financial reports from the following
years 2003-2005. The results shows current level of governance was not sufficient and suitable
for the investors in Pakistan. The inner firm differences were related to the valuation of investors
stocks. Those results were confirmed by most of studies as a developing market. It was
concluded that the corporate governance and the firm ownership structure would becomes
fruitful for the decision making process of KSE listed firms. That result shows a significant
increasing relationship between the qualities of firm level its ownership structure and the firm
performance with were associated with the firm value.

Lin et al (2009) investigate the derivatives usage, information asymmetric, and MNC post-
acquisition performance. Main purpose was to investigate the hedging polices can be playing the
important role for the better performance of MNC. And also found that use of derivative can
decrease the information asymmetric among the managers and the financial markets. By that
purpose the data of non financial firms were collected from the period 1992-1996. That study
examines the effects of derivative usage policy at a period of long run. It was also found that
strong and sophisticated polices of derivative has a positive impact on firm productivity. We also
contributed to the M&A literature by analyzing that the usage of derivative was an effective
activity that has great and over lasting effects on post merger performance. It was concluded that
significant value effect on derivative usage at corporate level to the reduction in agency
problems. Direct evidence of the strong evaluation effect from derivative and also give benefits
from the use of derivatives. The authors fail to found any different features of stock return and
there was the information was low. For those firms all derivative variables were similarly
insignificant. So the derivative usage as a corporate activity loses its functions and generating
positive performance when there was low information asymmetric was required.

Supanvanij and Strauss (2006) examine that effect of management compensation on firm
hedging. The main objective of that paper was to analyze the executive compensation benefits
with respect to options and stocks affected by a firm decision hedging. It was demonstrated that
when the management got incentives by using the interest rate, options and currency rate.. The
sample of 500 companies was selected from the period 1998-2000. It was investigated that
regulation designs to higher the clarity of derivative use, which changes the correlation among
the compensation of mangers and users of derivatives. Future research of derivative hedging as it
requires the fair market value of derivative contract which would be cause from income
fluctuations.

Hoa & Robert (2010) studied that does the type of derivative instrument used by company’s
effects firm value? The main object of this article is to find that how the corporate governance
affects on the currency derivatives usage on the firm. In this article we examined that how the
association between countries levels internal or the external effect on the firm value. Secondly
we check out the potentional impact of corporate governance on the correlation between value of
firm and the currency derivatives. Thirdly, we examine the internal country level governance and
external country level governance affects on the derivatives usage and firm value. This research
generally allowed ac-counting choices and other transactions to be determined endogenously.
.For the analysis we gathered the data of some foreign firms, which listed in the US stock
exchange between 1990 and 1999. In the previous studies the market to book ratio is used as the
proxy variable so by the help of Tobin Q calculations that showed that the effect of the market
value on the firm. For the analysis purpose we used the seven alternative governance rules for
example the firm is not used the inside block holder or on the other hand firm has the one
institutional and one is outside block holder for the calculation of the governance score. The
analysis find out that the positive relationship exist between the firms which are used the
currency derivatives. It is shows that on average basis the foreign currency derivatives usage
firms with the help of exchange rates exposure add the value in the firm. We also find out that
the firms which are used the Foreign currency derivatives with the exposure the cross country
currencies add value in the firm. Corporate governance plays role behind the use of foreign
currency derivatives and its potentional value for the firm. We also find that significant premium
of the firm specially those, which have the strong internal and external corporate governance.
The firm which have the weak corporate governance gain no premium at all Paper of the articles
shows that the implications of how the investor can assess or the use of FCD around the world
and also it is suggest us that the important of the corporate governance is the key reason of the
firms greater value with the benefits including the sound economic system of the country and the
yielding premium.

Belghitar et al (2013) the objective was to investigated about the foreign currency derivatives
on the shareholder value. The shareholders are the business partners who take part in the
business profits ways through their capital. Due to the involvement of the foreign currencies
around the world, the appreciation and the depreciation effect on the currency value, whether the
exposure is asymmetric or symmetric. Study find out that foreign currency derivatives used have
no impact on the value of firm and also when the data sample was broken down in the different
parts by the broad form like on the basis of exposure and the derivatives product types. To carry
out the analysis the firm was used the sample data of the largest non-financial firm in the French
countries and the data was on the yearly basis from 2002 to 2005.The available data at this year’s
was most valuable in this context for the analysis. Again the Tobin Q model applied on this data.
The results find out that the foreign exchange exposure was reduced by the using the derivatives
at the firm level. When the good or the bad exposure is statically asymmetric, it was evidence
that the hedging strategies are not exploiting the good exposure. All the results will helpful in the
future research especially for the French firms which are mostly used the foreign currency
derivatives. The results showed that there was the strong relationship exists between growth rate
of the firm and the derivatives which is used as the proxies by the different alternatives. Again,
the Tobin q procedure was used which is related to the firm control variable and with the
investment opportunities of the firms. The third hypothesis showed that the firms who had the
greater correlation between the investment and the cash flows use the fewer derivatives. The
Tobin q model showed that the differed, proxies that are set by the firms value with the usage of
derivatives. These all the proxies includes the earnings ratio, CARs research and the
development expenses and the market to the book value ratio. Our second finding is that we
examined about the derivatives usage and the firm’s cash stocks. We also find out that the more
opportunities in the field of the investment and by using the low level of the cash used the
derivatives. The most important findings that internally generated cash flows used by the firms
also used derivatives.
Gay et al (2013) the main focus of this study was to examine the all market design and the
products, which were traded as the derivatives in the all around the world, increase the price
discovery and the liquidity, transfer of risk among the economic agents were main functions of
the derivatives usage. The test showed that due to the highly market fluctuations the proposition
organization arrangements were not same and equal in the all markets. The data which is
gathered for the research purpose consists on the four parts in which the first part was includes
the ownership and the exchange membership. The second part of questionnaire is mostly focus
on the exchange traded products. The area also covered the contracts, the number of contracts,
and annual combined volume of the contracts in the traded exchange This was analyzed by the
help of the F test and the P test, which is also used by the economic and the capital markets
proxies. This can also be examined by the analyzing the difference between the developed and
the emerging conditions. Benefits of derivatives exchanges were not only focused on the risk
mitigation process and price discovery and the liquidity but also the more publicly information,
price and others markets information’s, improve the credit system, transaction cost reductions,
accurate forward prices etc. The derivatives markets along with the stock show at the level of
international investment that the benefits of the derivatives markets were used in the capitalism
system which is not the suitable word.
Switzer & Jalilvand (2000) the objective of this article was to documents the important
similarities and the difference in the derivatives users markets of Canadian USA and between the
European risk managers .The study also examined that the derivatives Instruments are more used
in the Canadian as compare to the others markets. To analyze the derivatives markets of the all
required countries the sample data was gathered by the detailed questionnaire which were sent
by the mail to the all the 548 largest Canadian non financial corporations. The detailed
questionnaires were sent to these institutions by the Montreal Exchange databases. According to
the estimate the total 116 out of the 154 firms are the users of the derivatives in the European
companies .However in the United States the range is falling down by 35% to the 85%.This data
was showed that the Canadian hedgers were positively larger and the higher ratios of long term
debt to market value. Ration analysis was used in this method. The study was examined the both
similarities and the difference between the European, US and the Canadian activities. Firm that
belongs to Canada and Europe have written the risk management policies, on the other hand not
benchmark their country performance. Also the policy was seldom integrated with the firm’s
financial or operating plans. All the surveys find out that the risk management programs remain
the introductory level.

Baker & Adedeji (2002) The objective of this article was to checked the validity of the previous
literature that the firms which were used the derivatives want to decrease their expected cost of
the financial distress, increase the market value .The other objective was to pointed out the
factors that motivate the firms to used the interest rate derivatives with those firms which were
used the currency rate derivatives. The data for the study were collected from the data stream and
from and survey. There were two proxies who are used by the firms called the financial
leverage and the interest rate. the interest value cover was showed by the ratio of interest to profit
before interest and tax, On the other hand the value of the financial leverage measured by the
ratio of the book value of total debt to firm value, Firm value was represented by the market
value of equity plus the book values of preference shares and total debt. There are the three main
variables, which were used for the hedging substitutes in which includes the straight debt,
dividend payout ratio, and the last one was the liquidity used as the financial instruments. The
previous research showed that the firm’s mostly used the derivatives for the reduction of the
financial cost and this was the main concern for the all shareholders’ interests. To conclude it
was find out that the financial distress and the economies of scale have significant relationship
and the shareholders have the zero influence by the used of the interest rate derivatives. In the
last, the help of the research that the capital markets or the shareholding patterns of the financial
institutions and the economies of large and small scale are those factors, which are motivated to
the firms to use the interest rate derivatives, also examined it.

Faff b & Nguyena (2010) The purposre of this paper was to find out the correlation among the
value of the firm and derivatives instruments used by the Australian firm and to examined the
impact of the all these instruments like of forward, futures, options and their impact on the values
of the firms and companies. The data of sample was taken from the year 1999 to the 2000.The
data sample was consists on the 428 firms in which 217 firms were related to the year of 1999 to
2000, The simple type of Tobin q was used to find out the results and this was measured by the
market value of book equity divided by the total book assets as the dependent variable. To find
out the results the sample was classified into the FUFO users, OP users and the SW Users. The
hypothesis was used to test that how the financial instruments such as swaps, forward, options
impact on the value of company. This was analyzed by the data sample of the Australian publicly
listed company.

Hagelin (2010) the objective of this paper was to examine the Swedish firms which was used the
currency derivative. The study was used the survey data with the combination of the publicly
data. The data was showed that the firms were used the derivatives instruments for the hedging
of their variety of risks. The firms were responded in October 1997 with the improvement of the
response rate about the questions. The questionnaire was consists on the eight questions which
were related to derivatives users in the Swedish firm. To investigate the research the Tobit
regression model was used which was combination of the probity analysis and a truncated
regression. The results from the Tobit model and the first step of the Cragg (1971) model, the
probity analysis, are used. After analyzing the complete results the research showed that all the
firms which were used the high level of human capital investment used the currency derivatives
than the all others firms which had the low level of the human capital .These all findings was
most important for the future research analysis because the transaction exposure hedging
techniques were used for the value maximization of the shareholders at the firm level.

Faulkender & Chernenko (2011) the focus of this paper was to know about why the non financial
firms use interest rate derivatives. It was also examined that used of interest rate derivatives
decrease the expected costs of financial distress or not. It was also analyzed to avoid costly
external financing by better matching of internal cash flows with the financing needs. How to
reduce the volatility of executive compensation? On the other hand, are they using interest rate
derivatives to speculate on movements in interest rates and to manage earnings? The data sample
was collected from the year 1993 to 2003.The results were not consistent with firms hedging to
reduce the financial costs and the tax rate complexity and also by the use of derivatives
instruments such as the interest rate swaps and floating rate debt over time. The study was
showed that when the executives used the high powered incentives so the incentives to time
swaps and floating rate debt usage are particularly strong. At the end the it was conclude that,
how and why the firms were used the derivatives. Our work also demonstrates that examinations
of firm derivatives usage to engage in hedging activities do not to rely on survey evidence like
that documented in Geczy et al. (2007).Mostly the firm were used the derivatives for the both
purpose like for the hedging and the speculation because every firm knows that the regulatory
body at the federal and the state level can be enable the firms to used the derivatives for risk
management purpose.

Hirtle (1997) the paper of the article was examined that the role of the derivatives as the financial
instrument as the interest rate sensitivity in the bank holding companies? To determine this data
sample gathered from the side of the US bank holding companies and these small bank holding
companies used the total assets with the total net worth of the 240 millions. The model which is
used in the article was the model of regression, and the year estimated for this model was from
1986 to the year 1994. this process each bank holding company was separated on the basis of the
Pramborg &Hagelin (2006) The purpose of this paper was to examined the derivatives usage
between the Swedish non financial firm in 2003and to compare these results the data as the
sample was given the Swedish firms in the 1996.The basic aim behind the study was to simply
compared that how the derivatives were changed in the seven year in the context of the firm
value hedging. The study used the simple primary data through the questionnaires and
investigates the simple sample firms. The firms were classified into the different sizes, and on
the derivatives usage basis. The change between these years was defined by the delta in the stock
value and option portfolio for the one percentage change in the prices of the stocks. Beta also
used which showed the one percentage change in the stocks return vitality. These results showed
that total 52 firms were used the derivatives which were then compared to those used the
derivatives in the period of 1996.This was showed that the significant increase in 2003 and the
more firms were used these financial instruments for the hedging or the firm value purpose
purposes. The use of derivatives in the Swedish firms in 2003 was specially to hedged the
balance sheet was higher than in 1996 when the mostly firms had the low knowledge about the
usage of the derivatives instruments. Future research can be based on the large firms with the
detailed analyses about the derivatives on the overall firm’s structure by using the large data
sample.
Timothy & Brewer (2014) In this paper the authors examined that how the interest rate
derivatives usage was effect on the loan value or the growth of the bank holding companies. In
this case the hypothesis was used to test that if the bank holding companies were used these
derivatives than their bank loan growth should be less sensitive to the core deposited growth. The
required data was collected through the secondary source by the Federal Reserve Bank holding
companies annually reports. The data was taken from the year 1986 to the year 2007 of the US
bank holding companies which hold the many one or the more holding companies at itself, so the
sample was taken at the large level .Due to the high volume of the data only the highest their
companies were included because to double counting was created the biases. We measured the
variable of the loan growth as by taken the logarithm of the all total loans and it was showed by
the “t” and this was then subtract from the logarithm of the total loans as the “t -1”. Core
Deposit Growth equals the logarithm of core deposits in quarter’s’ minus the logarithm of core
deposits in quarter‘t-1’. Log of Assets, a proxy for BHC asset size, equals the logarithm of the
level of total book value of assets. According to the given model all the derivatives users was
used as the indicator variable that was equal to the one only in the case if the BHC was as
interest rate derivatives, and also in the presenting quarter and zero if the case was other than.
Extent of the derivative usage was also equal to the total of the notional value of the interest rate
derivatives to the total assets. These all the results were find out that the all the bank holding
companies used the interest rate derivatives if in the case they was used the interest rate
derivatives. The results find out that the bank holding companies can used freely the any sources
of funds by using the interest rate derivatives and it was provide the potentional channel by the
positive effect on the bank lending. The research also provide the two main implications that the
interest rate derivatives provide the economically stability and also the BHC enjoyed the greater
sources of the risk without any risk and the constraints Interest rate sensitivity.

Huston and Stevenson (2010) studied impact of openness, hedging incentives and foreign
exchange exposure on a firm-level multi-country.the main objective behind this research was to
find out the difference of exchange exposure between open and closed economies and they
investigated that in a firm where managers were incentivized to maximized shareholders value
by hedging there were more chances to decrease the firm-level exchange exposure. of data
consist 3788 firms of 23 developed countries. The period of study was 1984-2003. They used
time series regression model. The findings of this paper showed that exchange rate movements
increased in case of open economy if industry and firm size variables were controlled properly.
The results indicated a strong inverse relation between extent of creditor protection and firm’s
exchange exposure and results also highlight positive correlation between trade openness and
firm-level exchange exposure.
Lel (2012) studied relationship between corporate governance value of firm and risk aversion.
The main objective behind this study was to investigate by adopting different corporate
governance measures firm value in stock was effected by risk aversion level and also identify
individuals preference related to risk aversion vary from country to country and to what extent
these preferences correlated with firm value. The sample of data was 45432 listed firms
worldwide with data on market capitalization in July 2010, financial banks because valuation
ratios of these firms were not compatible with other firms so banks were excluded used Tobin’s
Q to measured firm value and psychological survey conducted under Geert Hofstede for
measurement of uncertainty avoidance. According to the finding survey indicated that
uncertainty avoidance was not associated with firm value, results provided evidence that culture
influenced human preferences toward demand of risk financial assets, the more uncertainty
avoidance culture created more risk aversion and firm value declined. From policy implication
perspective before introducing new policies to promote shareholdings policy makers must
focused on human culture and values.
Bouwman (2014) studied the relationship of managerial optimism and earnings smoothing. The
objective of this paper was to examine that if CEO was optimist then earnings of firms increased
or declined. The sample contained firms that appeared at least four times in the Forbes 500 from
1984-1994. He Used Hickman’s two step correction model for analysis. The findings of this
paper indicated that firms earning increased if CEO was optimistic instead of rational managers.
This paper provided future research topics like behavior of optimists relative to rational
managers and risk prosecution for earning misreporting.
Agarwal et al (2009) studied the impact of managerial incentives on hedged funds performance.
The period of this study was 1994-2002. They examined their research questions using database
like CISDM, HFR, MSCI, and TASS. They Used time series analysis to find out variations in
returns. The findings of this paper showed that managerial ownership positively related with firm
performance, better managerial incentives increased firm performance and hedged funds
contracts were more effective in motivating managerial efforts.
Beber and Fabbri (2012) studied CEO characteristics and their effects on corporate speculation
according to foreign exchange market. Main purpose of this study was to examine variation of
foreign currency derivatives after firm, industry and market fundamentals explained by CEO
individual’s characteristics and personal beliefs. The period of study was 1996-2001. Panel data
set was used for USA non-financial firms. The findings indicated that the firms speculate whose
CEO holds the MBA degree and had less previous working experience. These results were
consistent that overconfident managers called risk taker. There were other related open questions
left for future research, For example why CEO Personnel characteristics affect personal
characteristics affect currency derivative holdings, when day-to-day hedging decisions for large
corporations are done mostly at the Treasurer level.
Pincus and Rajgopal (2006) studied in case of oil and gas firms hedging funds associated with
accrual management. This research paper investigated whether oil and gas firms were used
derivatives and abnormal accruals for the substitute of managed earning volatility. The sample
data was 236 firms. According to findings of study oil and gas firms faced price risk and
operational risk. Price risk hedge with derivative instruments but due to no existence of market
where firms could hedge the operational risk firms faced unsuccessful drilling. So firms used
derivatives instruments and abnormal accruals. The results showed that abnormal accruals were
not positively correlated determinant of hedging. The results were consistent that managers use
hedging decisions and at the margin, substitute among the abnormal accruals for smooth
earnings.
Masulis and Thomas (2009) inquired that the effects of derivatives on corporate governance. It
also explained its link with private equity. Data range that was taken in this paper was 2003-
2007. Data was taken from annual report on which regression model was applied to find out the
effects. In this study monitoring of derivative exposures was increased by private equity
involvement, by decreasing the size of board, made efficient information flows toward board, by
increasing control of board on managers, increasing incentive given to director for monitoring of
derivative exposure and appoint more sophisticated and highly qualified directors who
understand risk in good manners. But there was problem highlighted with reference to derivative
usage. As financial report do not give accurate, timely all results and information regarding to
derivative usage. So for that purpose firms must be considered who was with low management
shareholdings, performance and management compensation plan insensitive then that had poor
performance with regards to performance. And lastly who which were engaged in derivative
trading activities based on periods.

Barton (2007) studied and investigated the managers who used derivatives. This study
investigated that how manager use derivatives and hedge their risk. Data taken in this study
ranged as 1994-1996. In this study 500 firms were taken. These firms do not include mergers and
acquisitions. So after discretion only 304 firms were left in which 218 firms were derivative
users and 86 firms were non users. This study explained that there was no relationship exists
between derivatives and proxies for magnitude of discretionary accruals. This study explained
that this magnitude was endogenous. So this lead to joint decision in the management of risk and
decisions related to earnings. Managers can smooth firms and its performance by cash floes
adjustments and adjustments of accrual. SFAS form was used in this study that becomes
effective for fiscal years beginning after June 15 , 2000 so this was also recommendation to take
this concept in further research. So firm value can increased with the help of derivative usage.

Ferris et al (2007) studied on the derivative lawsuits as a corporate governance mechanism and
its empirical evidence on board changes surrounding filling. Main objective of this study is to
investigate the legal rights of investors are essentials for the corporate governance. Study identify
the accuracy of those rights by explaining the rights of shareholders the surrounding of
shareholders filing of derivative lawsuits. We determine the derivative suits in U.S firms from
the period of 1982-1999. By the purpose of obtaining the results of that derivative law suits for
the period of five years to get the details related to judgments. It is concluded that the firms
which have greater the agency cost they also have the rate of higher derivative law suits. The
derivative law suits also connected with the improvements of management of the firm. As a
result it should be considered as the firms which have higher derivative law suits have higher the
volume of corporate governance mechanism. It shows that the derivative law suits were becomes
very fruitful and beneficial for the adjustments of corporate governance. And it also shows that
the performance of those boards becomes very excellent with the presence of that derivative law
suits. The evidence must exist here that the decrease in the board size but some of those board
members still want to work at their present place or like to work as a CEO. Although there would
be a clear pattern that increase in corporate governance would be as a result of increase
derivative law suits.
 Masulis and Thomas (2007) studied and investigate the following that does the private equity
create wealth and also the impact of private equity and derivatives on corporate governance. It
was argued that the concentrated private equity was a very well and effective way. It was
investigated that the institutional information of that type of equity and there portfolio was also
discussed by the ownership. It would also be considered that the private equity would leads
towards the creating of value. The use of derivative for the public sector companies means that
the derivative starts some new challenges for that type of companies. It shows that the trade and
devolvement of these derivatives have some weak power on public sector companies and also
created a need for financially strong supervisor and the higher management. For that purpose the
annual reports of different public sector companies would be used as a sample for that study. It
was concluded that the financial reports can’t be shows the exact amount of derivatives in timely
and proper manner. In the public sector nor the senior management not the directors are
interested in the proper working of derivatives hedging. The finding of that study was that the
private equity firms were more interested and attractive towards the use of derivative as
compared to public sector companies. The found the following major issues like diffuse
ownership, low management of shareholders etc.

Mette Lausten (2002) the paper research was based on the replacement of the CEO and the
corporate performance of the Danish firms. We test the hypotheses that the CEO turnover was
inversely related to the firm productivity and the value .The research was with the evidence of
corporate governance and the corporate measure defined that how these variable changes effect
on the overall firm value. The results was consistent with the principle and the agent theory .The
threat at that time was arises because the CEO act became the greater interest of the shareholders
of the business. Moreover the status of the chairman and the family ownership was also effect on
the overall firm performance and the value of the firm. The data was contained the information
about the Vice presidents, higher level or the lower level managers also the complete information
about the CEO related to his job in the firm between the year from 1992 to the 1995.Because the
turnover is defined as dichotomous, the model for turnover of the CEO is specified as a logit
model: where P (Turnover) is the probability of CEO turnover. The results showed that there is
no relationship existed between the CEO turnover and the firm performance in the context when
the CEO acquires the power through the family ownership. And that the CEO was the important
entity of the organization socially when the family ownership was involved so it was better to
collectively remove the flaws which were arises due to the poor performance of the CEO without
the turnover.

Jang & Black (2003) the basic aim of the study was to examined that how the governance rules
and the corporate governance within the country level affected the overall firm’s performance
and the value of the organization. The paper also analyzed that how the corporate governances
can be improved which was lead to the high performance of the firm value because the corporate
governance can be changed as compare to the government rules and regulations. So how to make
the best practices which was created the value in the firm. The Tobin q model was applied to
analyze the results and the corporate level governance effect on the firms was compared to the
multi country level corporate governance. To examine the results through model different control
variables were assumed and the regression method was used. The results showed that there is the
positive correlation between the corporate governance and the firm value index and these results
were examined by the OLS,2OLS and the 3OLS regression model in alternate value of the
corporate governance and the and the alternate value of the firm.

Bhagat & Bolton (2009) the study was examined the relationship between the corporate
governance and the company performance .The data was based on the five measures of the
corporate governance between the 1998 to the 2007. According to the of Sarbanes-Oxley Act
(SOX) the data is categorized in the two panels in which one is for the pre 2002 and other was
post 2002. The primary source of the data was the Risk metrics directors and governance data
base. The Metrics provided the full information about the all large US companies governance
and directors from the 1990 to 2007.On the other hand the directors data base provided the
information from the year 1996 to the 2007.By using the Tobin q model in the previous research
it was examined that there is weak relationship between the board composition and the firm
productivity. Agrawal and Knoeber in the year 1996 also find that there is the no relationship
between the independence and the firm performance which is also measured by the Tobin q. But
the research find out that the positive and significant relationship was exist between the
independence and the firm performance after the 2002 and there is no relationship exist between
the independence and the firm performance before the 2002.

Tangb & Switzera (2009) the research paper was test the internal and the external governance
mechanism and the firm performance. In this research there three most important variables
including the firm leverage, CEO ownership and the pay performance sensitivity were observed.
These all the results mostly showed that the entrepreneurial skills of the CEO who was lead to
the firms internal or on the other hand the firms external performance. The data sample was
taken from the 245 firms or in the fiscal year from 2000 to the 2004.All the companies were
selected from the S&P 600 small cap index as of the august 31, 2006 in which the most
concerned elements were the corporate governance data from the definitive property statement,
Acquisition data from the SDC Tobin q and the accounting and the financial statements from
research insight. Black-Scholes model and the Tobin q were used to find out the overall results.
The research was find out that there was the no relationship between the CEO and the broad
independence with the suggestions that the CEO control over the board enhance equity positions
within the firm. It was also find out the board size had the mixed effect on the firm value and
sometimes strong negative correlation seems to shows that the smaller as compare to the larger
board of directors are more effective.

Cummins et al (2011) the main purpose of this was to investigate the motivation level for
corporate risk management and to test the most specific hypothesis in the insurance industry. The
main purpose to choose the insurance industry in this context was due to the information
availability and discloses the more information about the derivatives than the all other firms in
the industries. The authors in this article were set the hypothesis, and apply this test on the
sample of life property liability insurers. The data was consists on the US insurers which
described the regulatory put options .The author was used the two criteria in this model to
examine that whether the derivatives markets are active or not and also the derivative transaction
during or at the end of the year. The authors also used the approach which was also used in the
previous by Gunther & siems (1995 b).The author find that the insurers were used the derivatives
for the reduction in the expected cost. The decision to use the derivatives was associated to the
capital to asset ratio. The author showed that the mostly the derivatives are used by the firms to
hedge the firm’s assets, liquidity, fluctuations and for the risk mitigation of the exchange rate
risk. On the other hand the life insurers used the derivatives for the mitigation of the interest rate
risk. At the end after the results find out by the given sample that larger than average asset risk
exposures used the derivatives securities which have the effective implication for the insurance
regulations. It was also find that the state imposing the additional or more rules and the
regulations on the derivatives users and this issue was also received the more attention in the
next future by state and the federal regulation concern. The more work was still needed to check
out the total net effect of the derivatives or the hedging techniques in the risk profile of the
insurers. The authors also suggest at the end that the derivatives can be used by improving the
risk and the return efficiency of the insurance markets in this context. The restrictions which
were imposed by the federal and the state government could increase the risk of insurance
companies but also on the other hand reduce the ability of the insurers to access the risk
management.

Marsdena and prevost (2006) analysis with respect to New Zealand listed companies whether
derivative use, corporate governance and legislative change were associated. The primary
objective of this study was to highlight the role played by internal governance mechanisms in
companies’ derivatives decisions. The period of study was 1994-1997.Probit and Tobit
multivariate regression models were used for analysis. Probit analysis models the binary yes/no
decision to use derivatives, while Tobit analysis estimates the level of derivative use given that
the company uses derivatives. The findings of this paper indicated company capital structure,
size and liquidity of firm were positively associated with derivatives. Results suggested that
companies who had outside directors and higher growth companies used small portion
derivatives. In most of the research the researchers have concluded that financial hedging tool
i.e. Derivative is affecting the value of firm. The effect of this hedging exposure (Derivative) is
very high in developed economies as compare to developing economies. Studies that are taken in
our project are related to develop countries like US, France, Australia, New Zealand, China,
Pakistan and Finland. More work in above study is based on relationship between derivative and
factors like growth, investment, and size and CEO compensation plan. In accordance with
growth it was found that firms with higher growth trend have more focus on derivative usage as
compare to those firms which have low growth trend. Firms which have high investments have
more attention towards derivative usage because there risk level is higher. Firms have different
size patterns and with respect to these patterns there tendency to used derivatives varies. Most of
times larger firms used more derivative to hedge their high risk volume and small firms have less
focus on derivative usage because their risk pattern low. CEO compensation plans are directly
related to derivative usage when there are more CEO compensation plans then CEO will more
aware about derivative usage so derivative usage is high in that firms. By above studies we found
a gap among derivative usage and firm value. In this study we would try to fill gap by doing
research on the relationship among size of firm, derivatives, ownership structure and firm value
 CHAPTER 3

RESEARCH METHODOLOGY

3. RESEARCH METHODOLOGY

THEORITICAL FRAME WORK/ MODEL

Derivatives usage Firm Value

 1. Derivative usage Independent Variable
2. Firm Value Dependent Variable
3. Control Variables
Ownership Structure:
 Managerial ownership:
 Family ownership:
 Institutional ownership:
 Total assets
 Dividend
 Firm size
 Growth opportunities
 Leverage
 Return on Assets
4. Dummy Variables
Derivatives

Hypotheses

H1: Derivatives usage by a firm has significant impact on its market value

H2: Firm size has significant impact on its market value.

H3: Ownership structure has significant impact on its market value.

Sample Selection and Data

In order to investigate the impacts of derivatives usage on value of firm there is sample of 120
non financial companies listed on Karachi Stock Exchange for the duration of 2006-2013 is
considered. All the Financial companies are excluded from the sample because financial firms
are the main users and issuers of derivatives and sometimes act as market makers (Bashir et al.
2013) and most of financials firms use derivatives for speculation purpose. So hedging behavior
of financial and non financial firms cannot be same and that’s we only considered financial firms
for our study (Chaudhary et al.2014). For the above given reasons only non financial firms are
considered for the consistency of results. Only those financial firms are taken under
consideration which discloses information regarding the use of derivatives and make their annual
reports available on their websites.
The final sample consist of 120 firms and balanced panel data for eight years are used as a
sample and the secondary data use in our current study because all data are Collected from the
secondary sources which is Karachi Stock Exchange and the websites of non financial firms.
According to (Baltagi, D .2009) there are certain advantages of using balanced panel data which
are panel data is comprised of different firms and categories over time so the element of
heterogeneity is essential but panel data techniques allow to control individual heterogeneity,
provides more information and effectiveness, and reduces the probability of co-linearity problem
with greater degree of freedom. The panel data is also effective in order to observe the effects
which cannot be otherwise detected in single cross section and time series data.
Over an eight years sample period from 2006-2013 we obtain the derivatives usage of non
financial Pakistani firms which obtained from the footnotes within each firms annual report.
Mainly data of study is collected from annual reports of the firms which are taken from websites.
Information related to the derivatives usage is given under the heading of financial instruments in
notes to the account of annual reports. The annual reports are given from the KSE website. More
information is taken from the annual reports on the websites of firms. For all years in our data ,
we only consider the footnote information.

The main data sectors of our study are listed in KSE which are

S.NO SECTORS FIRMS

1 Food Producers Al- Abbas sugar mills ltd
Mitchell’s Fruit Farms Ltd
Nestlé Group Ltd
Shakarganj Mills Ltd
Unilever Pakistan Foods Ltd
 Rafan maize
Mirza sugar
Mehran sugar
J.D.W sugar
Adam sugar
Chashma sugar
pangrio sugar mill
Al noor sugar mill
Mirpur khas sugar mill
National foods
Noon sugar mill
Clover Pakistan
Habib Sugar mill
2 Household Goods Singer Pakistan Ltd
Tariq glass ind
Feroz industries
Shield Corporations
P& G
Zulfikar industries ltd
Wazir Ali industries ltd
Colgate Palmolive Pakistan
Unilever Pakistan ltd
3 Industrial Metal and Minning cresent steel
dost steel
siddiqsons tin plate
4 Industrial Transportation Pakistan national shipping corp
Pak International container terminal Ltd
5 Pharma and Bio Tech Sanofi Aventis
GSK
6 Textile Gull ahmed textile mill Ltd
Hira Textile Mills Ltd
Kohinoor mills Ltd
Nishat Mills Ltd
Quality textile mills Ltd
Quetta textile mills Ltd
shahtaj textile mill
blessed textile mill
Cresent cotton mill
Din textile
Fazal cloth
Gadoon textile mill
Mehmood textile Ltd
Zephry textile Ltd
ZIL Textile Ltd
Indus dying industries
 Hafiz textile mill
J textile
Resham Textile ltd
Kohinoor Industries ltd
Gulistan Mills
Sham Textile
Bhanero Textile mills
7 General industries Eco Pack Ltd
Ghani gas limited
Merit pakiaging limited
Pakages
Siemens
Tri pack
8 Media Hum network
9 Fixed line telecommunication Pak datacom
10 Oil and gas Attock petrol
Attock refinery
Burshane LPG XD
Byco petroleum
Mari petroleum
P.S.O
Pakistan petroleum
Pakistan refinery
Shell Pakistan
Pakistan oilfields
Oil & Gas Devel XD
Sui Northern Gas ltd
11 Forestry (paper and board ) Century paper
Security paper
12 Automobile and Parts Atlas Honda LTD
Indus Motor Co
Agri Auto Industries
Atlas Battery
Honda Atlas Cars
Exide pak
Gandara pak ltd
13 Construction And Material Cement Akzo Nobel ICI Pakistan Ltd
Bestway Cement Ltd
Dadex
Cherat Cement Ltd
Kohat Cement
Fauji Cement
Danto Cement
Gharibwal cement
Maple leaf Cement factory Ltd
 pioneer Cement
Power Cement
Attock Cement Pakistan Ltd
14 Chemicals Arif Habib Ltd
Dawood Hercules
Engro corporation
Ittehad Chemicals Ltd
Nimir Ltd
Biafo Industries Ltd
Fauji Fertilizer bin Qasim
15 Electricity Southern Electric power company Ltd (SEPCO)
16 Engineering Hino Pak Motors
Bolan Casting Ltd
Sazgar Engineering
PVC Ltd
Wahh nobel
Electronic and Electronic goods Pakistan Cables
Philips Electric company
Bal Wheel ltd
General tyre ltd
Fixed line telecommunications PTCL
Tobacco Pak Tobacco
Beverages Shezan
Murree
Travel and leisure PIA

VARIABLES

There are three types of variables are used in our study includes

1. Dependent Variable
2. Independent Variable
3. Control Variables

DEPENDENT VARIABLE

Firm Value
Firm value is taken as dependent variable of the study which is calculated by using Tobin’s Q.
which is measured by dividing market value of equity with the book value of equity (Bashir et
al.2013)
INDEPENDENT VARIABLE:

Derivative Usage

Use of derivatives is taken as independent variable. Companies listed on Karachi Stock

Exchange are required to disclose the information regarding the usage of financial derivatives
used for hedging purposes. Companies are also required to disclose the information of the risk
they faced and how these risks are tackled. Normally this information is presented under the
heading of financial Instruments in the notes to the accounts.

CONTROL VARIABLES:

Ownership Structure:
We collect annual data on ownership. Divide firms into three broad categories. Firms are
classified by whether they are controlled by a family, managers and institutional ownership.
Managerial ownership:
From corporative proxy statement, we gather data on the ownership of officers and directors and
the size of the board of directors. Directors currently employed by the companies or retired and
their spouse are considers as insiders of company. Directors that are outside of company are
taken as members who are only related with the company as directors.

Family ownership:
Companies whose founder or a member of the family by real blood or marriage is an officer, a
director, or the owner of at least 5% of the company’s equity, individually or as a group is
considered as a Family ownership.
Institutional ownership
The variable shows the equity position held by all institutional investors. Ownership dispersion is
measured by number of institutional owners and total institutional ownership
Total assets
Total assets value is given in balance sheet of the non financial firms.
Dividend

Dividend used as a dummy in our study.

Firm size

According to general perception, large firms are hedge more due to huge fixed cost that is
involved in running the operations of large firms. The study controls the firm’s size for two main
reasons firstly to find difference in value of Tobin’s Q for smaller and larger companies.
Secondly larger companies are hedge more than smaller companies. (Bashir et al. 2013). Natural
Logarithm of Total assets are taken to find out Firm’s size.

Growth opportunities

Future investment opportunities also affect firm value. Many researchers argue that firm’s
opportunities for future investment have direct influence on value of firm. Generally risk
managers have high level of opportunities related to investment so growth is calculated by
dividing capital expenditures with total assets.

Leverage

High leveraged companies are hedge more by the usage of derivatives. Hedging increase debt
capacity and also that debt capacity allows companies to use more debt and gets tax yield
advantage. Some other researchers found inverse relationship between firm value and leverage.
In order to control leverage effect the ratio of long term debts to assets is used.

Liquidity

Firms that have high liquidity have enough internal financing that they need no external
financing for undertaking projects so it can be expected that liquidity is positively related with
firm value. Liquidity decreases profitability of financial misbalances, cost of external financing
and projects of higher values affordable. Liquidity is measured by current ratio.

Return on Assets
Profitability is calculated by ROA. Like in general perceptions the more profitable companies
have higher quick ratio.ROA is calculated by dividing net profit after tax with total assets.
Annual reports are used for calculations of data of the non financial companies.

Dummy Variables

Derivatives

Derivative is used as a dummy variable as a proxy for evaluating the value of firm which takes
the value of 1 if company use derivative and 0 if the company do not use derivative. Data is
taken from the annual reports foot note of financial statements.

Sectors

We take different sectors from the KSE.

Model Specification:
To check the influence of the use of derivative on value of firm Tobin’s Q is used for our panel
data set of different companies. ( Lins. 2003) argued that simple Tobin Q require very less data
as input and yield effective results for the calculate companies value. To calculate Tobin’s Q
(i.e., firm value) as the market value of equity divided by book value of equity.

Tobin’s Q = Market value of Equity / Book value of Equity

Firm Size:

To examine that the firm size has different effect on interactions among derivative usage and
companies value we establish simultaneous equations on the relationship between investment,
financing and risk management decisions in firms of different sizes. The sample of firms are
consists into large, medium sized and small firms. Size is measured with the help of the natural
logarithm of the book value of the total assets of the companies. We regards a firm with total
assets value falling in top third of the sample as a large firms and the firms with value of total
assets falling in the bottom third of the sample are considered as small firms and remaining are
considered as a medium firms.
 CHAPTER 4
DATA ANALYSIS AND
DISCUSSION

4. DATA ANALYSIS AND DISCUSSION

This table represents the summary statistics related to derivative users and non users. It also
presents the total numbers of companies and percentage of companies using derivative and non
derivatives.
 Users Percentage Non Users Percentage
Derivative 57 47% 63 53%

OLS (ordinary least square method):

Dependent Variable: FIRMV

Method: Panel Least Squares
Date: 02/05/15 Time: 13:49
Sample: 2006 2013
Periods included: 8
Cross-sections included: 120
Total panel (balanced) observations: 960

Variable Coefficient Std. Error t-Statistic Prob.  

C 8.430471 0.377411 22.33767 0.0000

DERU 0.494049 0.158401 3.118976 0.0019
DIVIDEND 0.771574 0.152043 5.074712 0.0000
IO -1.940250 0.693469 -2.797890 0.0052
LEVERAGE -0.673730 0.364518 -1.848273 0.0649
SIZE 0.068871 0.037777 1.823092 0.0686
GROWTH -1.567019 0.323893 -4.838071 0.0000
FO -0.621844 0.284577 -2.185151 0.0291
MO -4.385156 1.428988 -3.068714 0.0022
LIQUIDITY -0.065005 0.225919 -0.287737 0.7736
ROA 0.926415 0.369406 2.507853 0.0123

R-squared 0.120027    Mean dependent var 8.420732

Adjusted R-squared 0.110755    S.D. dependent var 2.278112
S.E. of regression 2.148255    Akaike info criterion 4.378581
Sum squared resid 4379.633    Schwarz criterion 4.434348
Log likelihood -2090.719    Hannan-Quinn criter. 4.399818
F-statistic 12.94427    Durbin-Watson stat 0.423821
Prob(F-statistic) 0.000000

Interpretations:

From the above ordinary least square test (OLS) it shows the significance and insignificance of
data and its positive and negative results with t-Statistics and Probability. Derivative have
significant results with positive relationship with respect to firm value it means that firm value
should increase with derivative usage. Dividend has positive relationship and significant results
with firm value which shows that higher the dividend leads to higher the value of the firm. Firms
which pay dividend can avoid the problem of financial distress with the use of derivatives.
Institutional ownership has significant results and negative relationship with firm value.
Leverage has insignificant results and negative relationship with respect to company value higher
the value of leverage leads to lower the value of firm. Leverage has inversely related to firm
value. Size has insignificant results and positive relationship with respect to firm value. Results
indicated that the large firms use more derivative then smaller firms. Larger firms hedge more
because of two reasons. first is that some initial costs are required to established the derivative
markets and this cost is easily pay for larger firms due to economies of scale . Second reason is
that lager firms hedge because they have installed heavy fixed cost and it becomes necessary for
them to hedge against that huge cost. Growth has a inverse relationship and significant results
with value of firm. Family ownership and the managerial ownership have also significant results
and negative relationship with firm value. Managerial ownership has significant effect on firm
performance, better managerial incentive increase firm performance and hedge firm contracts are
more effective in motivating managerial efforts. Liquidity has negative relationship and also
insignificant results with value of firm’s mean that the higher the firm’s liquidity leads to lower
the value of firms. ROA has a significant results and direct relationship with value of firm that
means higher the value of ROA leads to raise the value of firms. Increase in total assets of the
firm leads to upward increase in firm value. The value of R-squared shows that the model tells
variability of the data around its mean so higher R-square means the better the model fits our
data. Adjusted R- square is positive so the model is not complex for the sample size and the
independent variable (derivative usage) have too high predictive value. The results suggest that
with the help of firm characteristics including dividend , family ownership , managerial
ownership , institutional ownership , return on assets , size , growth , derivative usage had
positive significant effects on firm value.

Redundant Fixed Effects Tests

Redundant Fixed Effects Tests

Equation: Untitled
Test cross-section fixed effects

Effects Test Statistic   d.f.  Prob. 

Cross-section F 29.126229 (119,830) 0.0000

Cross-section Chi-square 1578.258133 119 0.0000
Cross-section fixed effects test equation:
Dependent Variable: FIRMV
Method: Panel Least Squares
Date: 02/05/15 Time: 13:51
Sample: 2006 2013
Periods included: 8
Cross-sections included: 120
Total panel (balanced) observations: 960

Variable Coefficient Std. Error t-Statistic Prob.  

C 8.430471 0.377411 22.33767 0.0000

DERU 0.494049 0.158401 3.118976 0.0019
DIVIDEND 0.771574 0.152043 5.074712 0.0000
IO -1.940250 0.693469 -2.797890 0.0052
LEVERAGE -0.673730 0.364518 -1.848273 0.0649
SIZE 0.068871 0.037777 1.823092 0.0686
GROWTH -1.567019 0.323893 -4.838071 0.0000
FO -0.621844 0.284577 -2.185151 0.0291
MO -4.385156 1.428988 -3.068714 0.0022
LIQUIDITY -0.065005 0.225919 -0.287737 0.7736
ROA 0.926415 0.369406 2.507853 0.0123

R-squared 0.120027    Mean dependent var 8.420732

Adjusted R-squared 0.110755    S.D. dependent var 2.278112
S.E. of regression 2.148255    Akaike info criterion 4.378581
Sum squared resid 4379.633    Schwarz criterion 4.434348
Log likelihood -2090.719    Hannan-Quinn criter. 4.399818
F-statistic 12.94427    Durbin-Watson stat 0.423821
Prob(F-statistic) 0.000000

Interpretation:

The probability of redundant fixed effects is zero which shows the significant results so we use
fixed effect for our study and reject the random effect.

Hausman Test :

Correlated Random Effects - Hausman Test

Equation: Untitled
Test cross-section random effects
 Chi-Sq.
Test Summary Statistic Chi-Sq. d.f. Prob. 

Cross-section random 31.090443 10 0.0006

Cross-section random effects test comparisons:

Variable Fixed   Random  Var(Diff.)  Prob. 

DERU 0.054254 0.121145 0.001474 0.0815

DIVIDEND 0.166184 0.240579 0.001002 0.0188
IO 1.055769 0.705793 0.019565 0.0123
LEVERAGE -0.234418 -0.277940 0.001344 0.2352
SIZE -0.072187 -0.042659 0.000478 0.1768
GROWTH 0.044997 -0.087921 0.001501 0.0006
FO 1.088572 0.711864 0.021073 0.0095
MO -1.659063 -2.062449 0.125879 0.2556
LIQUIDITY -0.236962 -0.227718 0.000548 0.6930
ROA 0.196747 0.231470 0.000429 0.0936

Cross-section random effects test equation:

Dependent Variable: FIRMV
Method: Panel Least Squares
Date: 02/05/15 Time: 13:54
Sample: 2006 2013
Periods included: 8
Cross-sections included: 120
Total panel (balanced) observations: 960

Variable Coefficient Std. Error t-Statistic Prob.  

C 8.667772 0.405766 21.36152 0.0000

DERU 0.054254 0.133795 0.405502 0.6852
DIVIDEND 0.166184 0.121314 1.369868 0.1711
IO 1.055769 0.550600 1.917489 0.0555
LEVERAGE -0.234418 0.221666 -1.057529 0.2906
SIZE -0.072187 0.049313 -1.463838 0.1436
GROWTH 0.044997 0.211852 0.212396 0.8319
FO 1.088572 0.347336 3.134064 0.0018
MO -1.659063 1.238863 -1.339183 0.1809
LIQUIDITY -0.236962 0.141260 -1.677481 0.0938
ROA 0.196747 0.197657 0.995396 0.3198

Effects Specification

Cross-section fixed (dummy variables)

R-squared 0.829988    Mean dependent var 8.420732

Adjusted R-squared 0.803564    S.D. dependent var 2.278112
S.E. of regression 1.009684    Akaike info criterion 2.982478
Sum squared resid 846.1540    Schwarz criterion 3.641542
Log likelihood -1301.590    Hannan-Quinn criter. 3.233464
F-statistic 31.41081    Durbin-Watson stat 1.771737
Prob(F-statistic) 0.000000
Interpretation:

The probability of Hausman test is significant so we apply fixed effect test on our data for
analysis purpose. As Hausman test is used in order to determine which empirical test is more
suitable for estimating Tobin’s Q equation under the results of Hausman specification test the
individual effects are correlated with other repressors so fixed effect estimates are more
consistent and efficient in such situations.

Max Likelihood test (Fixed effect test):

Dependent Variable: FIRMV

Method: Panel Least Squares
Date: 02/05/15 Time: 13:52
Sample: 2006 2013
Periods included: 8
Cross-sections included: 120
Total panel (balanced) observations: 960

Variable Coefficient Std. Error t-Statistic Prob.  

C 8.407023 0.378488 22.21212 0.0000

DERU 0.504598 0.158871 3.176141 0.0015
DIVIDEND 0.768681 0.152383 5.044406 0.0000
IO -1.872511 0.695871 -2.690890 0.0073
LEVERAGE -0.643731 0.366629 -1.755811 0.0794
SIZE 0.068981 0.037849 1.822517 0.0687
GROWTH -1.548690 0.324763 -4.768680 0.0000
FO -0.627745 0.285056 -2.202177 0.0279
MO -4.501458 1.434965 -3.136981 0.0018
LIQUIDITY -0.047951 0.226758 -0.211462 0.8326
ROA 0.938725 0.371471 2.527050 0.0117

Effects Specification

Period fixed (dummy variables)

R-squared 0.124012    Mean dependent var 8.420732

Adjusted R-squared 0.108204    S.D. dependent var 2.278112
S.E. of regression 2.151334    Akaike info criterion 4.388625
Sum squared resid 4359.800    Schwarz criterion 4.479880
Log likelihood -2088.540    Hannan-Quinn criter. 4.423377
F-statistic 7.844572    Durbin-Watson stat 0.418622
Prob(F-statistic) 0.000000

Interpretation:
The probability of Hausman test is significant so we apply fixed effect of analysis and apply the
fixed likelihood test. Derivative have significant results with positive relationship with respect to
firm value it means that firm value should increase with derivative usage. Dividend has positive
relationship and significant results with firm value which shows that higher the dividend leads to
higher the value of the firm. Firms which pay dividend can avoid the problem of financial
distress with the use of derivatives. Institutional ownership has significant results and negative
relationship with firm value. Leverage has insignificant results and negative relationship with
value of firm, higher the value of leverage leads to lower the value of firm. Leverage has
inversely related to firm value. Size has insignificant results and positive relationship with
respect to firm value. Results indicate that the large firms are more likely to use derivative then
smaller firms. Larger firms hedge more because of two reasons. first is that some initial costs are
required to established the derivative markets and this cost is easily pay for larger firms due to
economies of scale . Second reason is that lager firms hedge because they have installed heavy
fixed cost and it becomes necessary for them to hedge against that huge cost. Growth has inverse
relationship and significant results with firm value. Family ownership and the managerial
ownership have also significant results and negative relationship with firm value. Managerial
ownership has significant effect on firm performance, better managerial incentive increase firm
performance and hedge firm contracts are more effective in motivating managerial efforts.
Liquidity has negative relationship and also insignificant results with value of company means
that the increase the liquidity of firms leads to lower the value of firms. ROA has a significant
results and direct relationship with value of firm means that the higher the value of ROA leads to
rise in the value of firm. When total assets increase the value of firms also increase. Firm leads to
increase in the value of the firm. The value of R-squared shows that the model tells variability of
the data around its average so the higher R-square means the better the model fits our data.
Adjusted R- square is positive so the model is not complex for the sample size and the
independent variable (derivative usage) have too high predictive value. The results suggest that
with the help of firm characteristics including dividend , family ownership , managerial
ownership , institutional ownership , return on assets , size , growth , derivative usage had
positive significant effects on firm value.

Correlations matrix:
 DIVIDEN LEVERAG GROWT
FIRMV2 DERU D IO E SIZE H FO MO LIQUIDITY ROA
FIRMV2 1
DERU 0.085179 1
DIVIDEND 0.226078 -0.1 1
IO -0.08132 -0.045 0.032104 1
LEVERAG
E -0.0946 0.1743 -0.18047 -0.032 1
-
SIZE 0.020831 -0.014 -0.03892 0.1411 0.037919 1
-
GROWTH -0.20298 -0.023 -0.21989 0.0396 0.05531 0.094 1
-
FO -0.09415 -0.176 -0.04135 0.1005 0.015604 0.0832 0.10588 1
MO -0.12401 0.0059 -0.15009 0.0052 0.171108 0.1308 -0.01461 -0.083 1
-
LIQUIDITY -0.04713 -0.037 -0.08895 0.0467 0.059444 0.0164 0.06331 0.0144 0.09 1
- -
ROA 0.131548 -0.075 0.173155 0.0265 -0.018724 -0.068 -0.12879 -0.064 0.08 -0.02152 1

Interpretations:

The correlation coefficient suggests that firm value have positive correlation with derivative
usage .as firm value increase by the usage of derivative their 0.08 correlation exist between firm
value and derivative usage. Firm value has positive relationship with dividend. Higher the
dividend leads to higher the value of firm its means firms which pay more dividend can avoid the
financial distress issue with the help of derivative usage that increase the firm value. There is
0.22 correlation exists between firm value and dividend. There is negative correlation between
value of firm and institutional ownership. The correlation among value of firm and institutional
ownership is -0.08 that shows inverse relation among value of firm and institutional ownership.
Firm value has negative correlation with leverage. As rise in the value of debt capacity leads to
lower the value of firm. There is -0.09 correlations between firm value and leverage which
shows leverage has inversely related t firm value. Firm value has positive correlation with size.
Large firms are more likely to use derivatives then smaller firms because higher firms have high
initial cost and fixed cost so larger companies are more interested to use derivatives then smaller
companies and that leads to higher firm value so there is direct relationship exist between firm
value and size . There are 0.02 positive correlations between firm value and size. Firm value
have negative correlation with growth that is -0.2 so it shows inverse relationship between both
of them. Firm’s value has negative correlation with family ownership and managerial ownership.
There is -0.09 and -0.12 correlation exists between firm value and family ownership and
managerial ownership respectively. There is inverse correlation between firm value and liquidity
as higher the liquidity of firm’s take to lower the value of firms there is -0.04 correlations exist
between firm value and liquidity so relationship is inverse in this case. Firm value has positive
correlation with ROA it means that higher the value of ROA leads to increase in the value of
firms. When value of total assets increased then on the other hand firm value also increase. There
is 0.13 correlations of firm value and ROA which indicates direct relationship between firm
value and derivative usage. Firm value has negative correlation with institutional ownership,
leverage, growth, family ownership, managerial ownership and liquidity. On other hand firm
value has positive correlation with derivative usage, dividend, size and ROA.

PANEL A: DESCRIPTIVE STATISTICE OF FULL SAMPLE

Observations Mean Median Maximum Minimum Std. Dev. Probability

FIRMV2 960 8.420732 8.208918 16.33025 0.963711 2.278112 0

DERU 960 0.297917 0 1 0 0.457581 0

DIVIDEND 960 0.616667 1 1 0 0.486452 0

 IO 960 0.089407 0.0586 0.7611 0 0.101959 0

LEVERAGE 960 0.103859 0.008118 3.404168 0.732186 0.198972 0

SIZE 960 7.589125 7.370164 11.33767 2.194637 1.887016 0

GROWTH 960 0.474264 0.450333 0.994822 0.020492 0.223035 0

FO 960 0.183733 0.01 0.9311 0 0.253145 0

MO 960 0.022659 0.0002 0.35 0 0.050717 0

LIQUIDITY 960 0.36375 0.212187 0.999893 0.969639 0.310521 0

ROA 960 0.073929 0.042266 4.078794 0.900416 0.193298 0

Interpretation:

Tables presents the descriptive statistics of variables of the study in 3 panels named panel A, B
and C for our sample, derivative users and non derivative users. Panel A depicts statistics of
whole sample of 120 firms and 960 observations. Starting from dependent variable means value
of Tobin’s Q is 8.42 the median value of this variable is subsequently different from their mean
value which is 8.20. It means that the Tobin’s Q distribution in the current data is skewed in the
right side. The mean value of derivative is 0.29 and in the whole sample 30% firms are used
derivative. The mean value of dividend is 61% of the firms pay dividend. 8% of the sample firms
used Institutional ownership and 18% family ownership and 2% managerial ownership. 10%
portion of capital is financed with long term debts. The mean value of size (total assets) in the
whole sample is 7.58. Growth rate is 47.42% while ROA is 7%. Current ratio depicts liquidity
position. It shows the moderate liquidity positions of the firms.

PANEL B: DESCRIPTIVE STATISTICS OF DERIVATIVE USERS

Std.
Observations Mean Median Maximum Minimum Dev. Probability
FIRMV2 456 8.451645 8.508491 14.24956 3.123 2.044817 0.583846
DERU 456 0.627193 1 1 0 0.484082 0
DIVIDEND 456 0.539474 1 1 0 0.498987 0
IO 456 0.083712 0.064505 0.7611 0 0.093827 0
LEVERAG
E 456 0.153325 0.053327 3.404168 -0.0055 0.246886 0
SIZE 456 7.506475 7.086681 10.90652 2.600525 1.71637 0.700227
 GROWTH 456 0.487284 0.46042 0.994822 0.020492 0.221946 0.000735
FO 456 0.153934 0 0.9311 0 0.25134 0
MO 456 0.025074 0.0002 0.3153 0 0.054651 0
LIQUIDITY 456 0.362143 0.214118 0.999893 -0.96964 0.320883 0.002141
ROA 456 0.0589 0.033123 0.716237 -0.46612 0.107721 0

PANEL C: DESCRIPTIVE STATISTICS OF NON DERIVATIVE USERS

Std.
Observations Mean Median Maximum Minimum Dev. Probability
FIRMV2 504 8.392764 7.932231 16.33025 0.963711 2.47199 0.000002
DERU 504 0 0 0 0 0 NA
DIVIDEND 504 0.686508 1 1 0 0.464373 0
IO 504 0.094559 0.05385 0.7298 0 0.10863 0
LEVERAGE 504 0.059104 0.000513 0.914619 0.732186 0.126961 0
SIZE 504 7.663905 7.9654 11.33767 2.194637 2.027889 0
GROWTH 504 0.462484 0.440282 0.989574 0.052782 0.223582 0.000037
FO 504 0.210693 0.096228 0.9062 0 0.251993 0
MO 504 0.020475 0.0002 0.35 0 0.046823 0
LIQUIDITY 504 0.365203 0.211529 0.999287 0.000895 0.301151 0
ROA 504 0.087526 0.05133 4.078794 0.900416 0.245663 0

Interpretation of Comparison:

Panel B and C help to compare the mean and median results for derivative users and non users
Tobin’s Q on average of derivative users is greater than the median value of Tobin’s Q of non
derivative users .this results is in consistent with the argument that investors value higher to
those firms which manage their risk by hedging the ratio of derivative users is 62%. The 53% of
derivative users firms pay dividend while on the other hand on average 68% of non derivative
users pays dividend. The firms who used derivative have 8%, 15 % and 2% institutional
ownership, family and managerial ownership respectively. On the other hand a non derivative
users firm has 9%, 21% and 2% institutional, family and managerial ownership. The mean value
of leverage of derivative users firms is 15% which is significantly greater than the mean value of
5% of non derivative users. It shows derivative users firms are more leveraged than non
derivative users firms. And it is according to the previous finding which shows that the use of
derivative increases debt capacity which allow firm to take tax shield advantages. The average
size of derivative users firms is 7.5 which is less than the mean value 7.6 of non derivative users
firms. The mean value of growth of derivative users firms is 48% and which is larger than mean
value of 46% of non derivative users firms. This results indicates that the decision to use
derivative affect positively to firm growth. Hedging increase the liquidity of firm as a results of
excessive cash and un used debt capacity but our results does not support this statement because
current ratio of derivative users firms on average is 0.3621 which is almost equal with the mean
value 0.3652 of non derivative users firms.ROA on average for derivative users firms is 0.05 and
0.08 for non derivative users.

Table for Group Statistics

Group Statistics

Groups N Mean Std. Deviation Std. Error Mean

IO 1 8 .083712 .0085768 .0030324

0 8 .094559 .0070899 .0025067

FO 1 8 .153934 .0049100 .0017360

0 8 .210693 .0077232 .0027305

MO 1 8 .025074 .0023974 .0008476

 0 8 .020475 .0053981 .0019085

Dividend 1 8 .539474 .0681087 .0240800

0 8 .686508 .0454930 .0160842

Size 1 7.506475E
8 .0347632 .0122907
0

0 7.663905E
8 .1476033 .0521857
0

Liquidity 1 8 .362143 .0321263 .0113584

0 8 .365203 .0280728 .0099252

Growth 1 8 .487284 .0179311 .0063396

0 8 .462484 .0281099 .0099384

Leverage 1 8 .153325 .0318226 .0112510

0 8 .059104 .0180429 .0063791

ROA 1 8 .058900 .0186649 .0065990

0 8 .087526 .0247545 .0087520

FIRMV2 1 8.451645E
8 .2146925 .0759053
0

0 8.392764E
8 .1542912 .0545502
0

DERU 1 8 1.00 .000a .000

0 8 .00 .000a .000

Independent Sample Test

Independent Samples Test

Levene's Test for Equality of
Variances t-test for Equality of Means
95% Confidence Interval of
the Difference
Sig. (2- Mean Std. Error
F Sig. t Df tailed) Difference Difference Lower Upper
Equal variances 0.91
IO assumed 0.013 3 -2.757 14 0.015 -0.0108467 0.0039343 -0.0192849 -0.0024085
Equal variances
not assumed -2.757 13.521 0.016 -0.0108467 0.0039343 -0.019313 -0.0023804
-
Equal variances 0.02 17.54
FO assumed 6.285 5 2 14 0 -0.056759 0.0032356 -0.0636988 -0.0498192
 -
Equal variances 17.54
not assumed 2 11.864 0 -0.056759 0.0032356 -0.0638178 -0.0497001
Equal variances
MO assumed 5.81 0.03 2.203 14 0.045 0.0045994 0.0020883 0.0001205 0.0090783
Equal variances
not assumed 2.203 9.658 0.053 0.0045994 0.0020883 -0.000076 0.0092748
Equal variances 0.42
Dividend assumed 0.673 6 -5.078 14 0 -0.1470343 0.0289577 -0.2091424 -0.0849261
Equal variances
not assumed -5.078 12.209 0 -0.1470343 0.0289577 -0.210008 -0.0840605
Equal variances
Size assumed 25.138 0 -2.936 14 0.011 -0.1574298 0.0536135 -0.2724192 -0.0424403

Equal variances
not assumed -2.936 7.774 0.019 -0.1574298 0.0536135 -0.2816905 -0.033169

Equal variances 0.36

Liquidity assumed 0.881 4 -0.203 14 0.842 -0.0030602 0.0150838 -0.0354118 0.0292914

Equal variances
not assumed -0.203 13.753 0.842 -0.0030602 0.0150838 -0.0354665 0.0293461

Equal variances 0.19

Growth assumed 1.862 4 2.104 14 0.054 0.0247999 0.0117882 -0.0004832 0.0500831

Equal variances
not assumed 2.104 11.887 0.057 0.0247999 0.0117882 -0.0009113 0.0505112

Equal variances 0.39

Leverage assumed 0.766 6 7.285 14 0 0.0942214 0.0129336 0.0664816 0.1219612

Equal variances
not assumed 7.285 11.079 0 0.0942214 0.0129336 0.0657795 0.1226633

Equal variances 0.57

ROA assumed 0.326 7 -2.612 14 0.021 -0.0286268 0.0109611 -0.052136 -0.0051176

Equal variances
not assumed -2.612 13.015 0.022 -0.0286268 0.0109611 -0.052304 -0.0049496

Equal variances 0.41

FIRMV2 assumed 0.717 1 0.63 14 0.539 0.0588816 0.0934737 -0.1415995 0.2593628

Equal variances
not assumed 0.63 12.708 0.54 0.0588816 0.0934737 -0.1435287 0.2612919

Interpretation:

Interpretation of group statistics box:

In the group statistics box first column two numbers are shows 1 and 0 .under the words
groups’ .these numbers are used to represent our two group’s situations. In this box for
institutional ownership the average for condition 1 is 0.08 the average for condition 2 is 0.09.
The standard deviation for group 1 is 0.008 and for other condition 0.007.for family ownership
the mean for condition 1 is 0.15 and 0.21 for other one. Standard deviation for condition 1 is
0.004 and 0.007 for other respectively. For managerial ownership mean for 1 condition is 0.02
and 0.02 for condition 2. The standard deviation for 1 st condition is 0.002 and 0.005 for 2nd
condition. For dividend mean for 1 condition is 0.5 and 0.6 for 2 nd condition. The standard
deviation for 1st condition is 0.06 and 0.04 for 2nd condition. For size mean for 1 condition is
7.5and 7.6 for 2nd condition. The standard deviation for 1st condition is 0.03 and 0.14 for 2nd
condition. For liquidity mean for 1 condition is 0.36 and 0.36 for 2nd condition. The standard
deviation for 1st condition is 0.03 and 0.02 for 2 nd condition. For growth mean for 1 condition is
0.48 and 0.46 for 2nd condition. The standard deviation for 1st condition is 0.01 and 0.02 for 2 nd
condition. For leverage mean for 1 condition is 0.15 and 0.05 for 2nd condition. The standard
deviation for 1st condition is 0.03 and 0.01 for 2 nd condition. For ROA mean for 1 condition is
0.05 and 0.08 for 2nd condition. The standard deviation for 1st condition is 0.01 and 0.02 for 2 nd
condition. For firm value mean for 1 condition is 8.4516E0 and 8.3927E0 for 2 nd condition. The
standard deviation for condition 1 is 0.21 and 0.15 for 2 nd condition. For derivative usage mean
for 1 condition is 1 and 0 for 2 nd condition. The standard deviation for 1 st condition is 0 and 0 for
2nd condition. The number of participants in each condition (N) is 8. This table shows us the
level of difference between conditions and we can see groups with respect to their higher mean.
For example, we can see that the average value for 1 st condition is greater than average value for
condition 2 in growth, leverage, firm value and derivative usage.

Interpretation of independent sample test:

In the independent sample test table firstly look at column levene’s test for equity of variances.
In this column for institutional ownership we look at the significant value 0.9 as this value is
greater than 0.05 which means that the variation in same in both conditions. It means that result
in 1 condition does not change do more than results in 2nd conditions. Put scientifically means
that variation in 2nd conditions is not different significantly so we read from the first row. In
significant (2- tailed) column value is 0.015 which is less than 0.05 that indicates that there are
statistical significant difference among two conditions. So it concludes that differences between
conditions are not due to change and are probably due to group’s manipulation.

For family ownership we look at the significant value 0.02 as this value is less than 0.05 means
that the variation in our two conditions is not same. It shows that result in 1st condition does vary
too much more than the results in 2nd conditions. Put scientifically, means that variation in 2nd
conditions is significantly change so we read from the second row. In significant (2- tailed)
column value is 0.0 which is less than 0.05 that indicates that there are significant difference in
our two conditions. So it concludes that differences between conditions are not due to change
and are probably due to group’s manipulation.

For managerial ownership we look at the significant value 0.03 as this value is less than 0.05
means that the variation in our two situations is not same. It means that result in 1 condition does
vary too much more than the results in 2 conditions. Put scientifically, means that variation in 2
conditions is significantly change so we read from the second row. In significant (2- tailed)
column value is 0.05 which is equal to 0.05 that indicates that there are significant difference
between our two conditions. So it concludes that differences in conditions are not due to change
and are probably due to group’s manipulation.

For dividend we look at the significant value 0.42 as this value is greater than 0.05 means that
the variation in our two situations is about the same. It means that result in 1 condition does not
vary do much more than the results in 2 conditions. Put scientifically, means that variation in 2
conditions is not significantly different so we read from the first row. In significant (2- tailed)
column value is 0.0 which is less than 0.05 that indicates that there are significant difference
between our two conditions. So it concludes that differences between situations are not due to
change and are probably due to group’s manipulation.

For size we look at the significant value 0.00 as this value is less than 0.05 means that the
variations in our two situations are not same. It means that result in 1 condition does vary too
much more than the results in 2 conditions. Put scientifically, means that variation in 2
conditions is significantly different so we read from the second row. In significant (2- tailed)
column value is 0.019 which is less than 0.05 that indicates that there are significant difference
between our two conditions. So it concludes that differences between situations are not due to
change and are probably due to group’s manipulation.

For liquidity we look at the significant value 0.36 as this value is greater than 0.05 means that
the variation in our two situations is about the same. It means that result in 1 condition does not
vary do much more than the results in 2 conditions. Put scientifically, means that variation in 2
conditions is not significantly different so we read from the first row. In significant (2- tailed)
column value is 0.84 which is greater than 0.05 that indicates that there are no statistical
significant difference between our two conditions. So it concludes that differences between
situations are due to chance and are not due to group’s manipulation.

For growth we look at the significant value 0.19 as this value is greater than 0.05 means that the
variation in our two situations is about the same. It means that result in 1 condition does not vary
do much more than the results in 2 conditions. Put scientifically, means that variation in 2
conditions is not significantly different so we read from the first row. In significant (2- tailed)
column value is 0.05 which is equal to 0.05 that indicates that there are significant difference
between our two conditions. So it concludes that differences between situations are not due to
change and are due to group’s manipulation.

For leverage we look at the significant value 0.39 as this value is greater than 0.05 means that
the variation in our two situations is about the same. It means that result in 1 condition does not
vary do much more than the results in 2 conditions. Put scientifically, means that variation in 2
conditions is not significantly different so we read from the first row. In significant (2- tailed)
column value is 0 which is less than 0.05 that indicates that there are significant difference
between our two conditions. So it concludes that differences between situations are not due to
change and are due to group’s manipulation.

For ROA we look at the significant value 0.57 as this value is greater than 0.05 means that the
variation in our two situations is about the same. It means that result in 1 condition does not vary
do much more than the results in 2 conditions. Put scientifically, means that variation in 2
conditions is not significantly different so we read from the first row. In significant (2- tailed)
column value is 0.02 which is less than 0.05 that indicates that there are significant difference
between our two conditions. So it concludes that differences between conditions are not due to
change and are due to group’s manipulation.

For firm value we look at the significant value 0.41 as this value is greater than 0.05 means that
the variation in our two situations is about the same. It means that result in 1 condition does not
vary do much more than the results in 2 conditions. Put scientifically, means that variation in 2
conditions is not significantly different so we read from the first row. In significant (2- tailed)
column value is 0.53 which is greater than 0.05 that indicates that there are no significant
difference between our two conditions. So it concludes that differences between conditions are
due to chance and are not due to the group’s manipulation.

Results Comparison with Previous Studies:

Finding of our research are consistence with most of researches which are conducted for
developing and emerging economies (Bashir et al 2013, Chaudhary et al .2014).In all of those
researches, there is direct relationship between derivatives use and value of firm. (Carter et al
2006 ,Brown et al.2006 ,Jorion & Yanbo 2006 Naranjo & fauver 2010 ,Zou 2010 ,Miller et
al.2012 ,Brown, khediri & Folus 2010 ,Faff & Nguyena 2010 , ,Miller et al.2012 , Bashir et al
2013 ,Chaudhary et al .2014 ) . We have also a strong significance positive relationship between
Dividend, ROA and firm size and firm value (Bashir et al 2013, Wang 2013). There is very
significant negative relationship between managerial ownership, growth (Naik et al 2009 Bashir
2013, Bouwman 2014).
 CHAPTER 5

CONCLUSION

5. CONCLUSION

The current study investigate the hypothesis that whether firm’s using derivatives are value
higher or not in doing so a sample consist of 120 non-financial Pakistani companies for the
period of 2006 to 2013 is considered. Firm value is mainly measured through Tobin q. previous
studies shows that mix results of positive, negative and no effects of derivative usage on value of
firms. Outcomes of our study are inconsistent with theories of relationship between the usage of
derivate and the value of firm. This study included new variables which are institutional
ownership and family ownership to estimate the title of the study which was not used with any
other related research. The main finding of this research suggests that there is strong positive
relationship between the derivative usage firm value, dividend, size, growth, institutional
ownership, family ownership and the managerial ownership. The study divides the data into two
parts as the users of the derivative and the non user’s derivative. However the T test was used to
examine the difference between two groups. The empirical results of T test characterized user as
large size companies have higher growth opportunities more managerial incentives, dividend,
liquidity, ROA, family and the institutional ownership. The study does not found any positive
significant relationship of the leverage and the liquidity. At the end firm’s specific factors such
as growth options, size, dividend, ROA, family, institutional and the managerial ownership have
stronger influence on the derivative usage.

5.1 Major findings of study

The main findings of the study are as follows:

 The main findings of the research suggest that there is the direct and the significant
relationship between the derivatives usage value of firms, dividend, and ROA. On the
other side there is the negative but significant relation between growth, size, institutional
ownership, family and the managerial ownership. The other two variables including the
liquidity and the leverage is negatively but insignificantly related with the derivatives
usage.
 Correlation coefficient suggests that firm value have positive correlation with derivative
usage, dividend, size and ROA. There is negative correlation of firm value with
institutional ownership, leverage, family ownership, managerial ownership, and liquidity.
 The major finding of our study is that mean and median value of Tobin q of derivative
users is higher than mean and median value of non-derivative users. Derivative users
firms pay fewer dividends as compare to derivative users. Mean value of derivative users
companies is greater than the non-derivative users firms. Our results indicates that the
decision to use derivative effect positively to firm growth. Hedging increase the liquidity
of the firms.ROA for the derivative users firms is lower than the non-derivative user
firms.
  From T statistics results shows that for institutional ownership, family ownership,
managerial ownership, dividend, size, growth and ROA there are statistical difference
between two conditions (1 and 2 groups).For liquidity and firm value there are no
statistical significant relationship difference between both conditions.
 Our study explains that the derivative usage is helpful in the risk management as the
firm size and its growth options are major elements in this context. This research work
provide the guidelines for higher management and professional to evaluate
organizational risk before come into derivative market and implement it to achieve the
economies of scale.

5.2 Policy implications

Our empirical finding revealed that relationship between the derivative usage and value of firm is
significant. There are significant presents of dividend, ROA, size, family ownership, institutional
ownership, managerial ownership and growth with respect to firm value. So we strongly
recommend the policy makers to established derivative markets and used other financial
instruments in order to minimize firm risk. It is also suggested that there should be some hedging
management department in all firms which are involved in providing awareness about use of
derivative to general public. Because Pakistan is under developing country and in Pakistan stock
bonds and money markets are not well organized which is necessary for the trading of
derivatives because many times stocks, bonds and money market instruments served as
underlining assets. We recommend that the regulatory authority provides permission to the
companies to launch their derivatives like future stocks because up to 2011 only 42 companies
has permission to launch derivatives like future stocks. Government should adopt such policy
which promotes the derivatives in Pakistan in positive manner and for growth of financial
system. Better policy in this concern not only will increase the size of stock market but also will
provide the depth of market, tax advantage, investor’s confidence and business growth.

Derivatives is a newly emerged field of research and in Pakistan no research word done on that
broad area there for a lot of research can be conducted on this field and especially in Pakistan. In
future the researchers may focus on use of derivative with culture, corporate governance, and
CEO ownership that effects firm value. They also make comparison between financial and non
financial firms that use derivatives.
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APPENDIX
LIST OF COMPANIES

1. Al- Abbas sugar mills ltd 12. pangrio sugar mill

2. Mitchell’s Fruit Farms Ltd 13. Al noor sugar mill
3. Nestlé Group Ltd 14. Mirpur khas sugar mill
4. Shakarganj Mills Ltd 15. National foods
5. Unilever Pakistan Foods Ltd 16. Noon sugar mill
6. Rafan maize 17. Clover Pakistan
7. Mirza sugar 18. Habib Sugar mill
8. Mehran sugar 19. Singer Pakistan Ltd
9. J.D.W sugar 20. Tariq glass ind
10. Adam sugar 21. Feroz industries
11. Chashma sugar 22. Shield Corporations
23. P& G 70. Mari petroleum
24. Zulfikar industries ltd 71. P.S.O
25. Wazir Ali industries ltd 72. Pakistan petroleum
26. Colgate Palmolive Pakistan 73. Pakistan refinery
27. Unilever Pakistan ltd 74. Shell Pakistan
28. cresent steel 75. Pakistan oilfields
29. dost steel 76. Oil & Gas Devel XD
30. siddiqsons tin plate 77. Sui Northern Gas ltd
31. Pakistan national shipping corp 78. Century paper
32. Pak International container terminal 79. Security paper
33. Sanofi Aventis 80. Atlas Honda LTD
34. GSK 81. Indus Motor Co
35. Gull ahmed textile mill Ltd 82. Agri Auto Industries
36. Hira Textile Mills Ltd 83. Atlas Battery
37. Kohinoor mills Ltd 84. Honda Atlas Cars
38. Nishat Mills Ltd 85. Exide pak
39. Quality textile mills Ltd 86. Gandara pak ltd
40. Quetta textile mills Ltd 87. Akzo Nobel ICI Pakistan Ltd
41. shahtaj textile mill 88. Bestway Cement Ltd
42. blessed textile mill 89. Dadex
43. Cresent cotton mill 90. Cherat Cement Ltd
44. Din textile 91. Kohat Cement
45. Fazal cloth 92. Fauji Cement
46. Gadoon textile mill 93. Danto Cement
47. Mehmood textile Ltd 94. Gharibwal cement
48. Zephry textile Ltd 95. Maple leaf Cement factory Ltd
49. ZIL Textile Ltd 96. pioneer Cement
50. Indus dying industries 97. Power Cement
51. Hafiz textile mill 98. Attock Cement Pakistan Ltd
99. Arif Habib Ltd
52. J textile
100. Dawood Hercules
53. Resham Textile ltd
101. Engro corporation
54. Kohinoor Industries ltd
102. Ittehad Chemicals Ltd
55. Gulistan Mills
103. Nimir Ltd
56. Sham Textile
104. Biafo Industries Ltd
57. Bhanero Textile mills
105. Fauji Fertilizer bin Qasim
58. Eco Pack Ltd
106. Southern Electric power company Ltd
59. Ghani gas limited 107. Hino Pak Motors
60. Merit pakiaging limited 108. Bolan Casting Ltd
61. Pakages 109. Sazgar Engineering
62. Siemens 110. PVC Ltd
63. Tri pack 111. Wahh nobel
64. Hum network 112. Pakistan Cables
65. Pak datacom 113. Philips Electric company
66. Attock petrol 114. Bal Wheel ltd
67. Attock refinery 115. General tyre ltd
68. Burshane LPG XD 116. PTCL
69. Byco petroleum
117. Pak Tobacco 120. PIA
118. Shezan
119. Murree

LIST OF DERIVATIVE USER COMPANIES

1. Al- Abbas sugar mills ltd 13. Pak International container terminal
2. Mitchell’s Fruit Farms Ltd 14. Sanofi Aventis
3. Nestlé Group Ltd 15. GSK
4. Shakarganj Mills Ltd 16. Gull ahmed textile mill Ltd
5. Unilever Pakistan Foods Ltd 17. Hira Textile Mills Ltd
6. Rafan maize 18. Kohinoor mills Ltd
7. Singer Pakistan Ltd 19. Nishat Mills Ltd
8. Shield Corporations 20. Quality textile mills Ltd
9. P& G 21. Quetta textile mills Ltd
10. cresent steel 22. shahtaj textile mill
23. blessed textile mill
11. Siddiqsons tin plate
24. Cresent cotton mill
12. Pakistan national shipping corp
25. Gadoon textile mill 41. Indus Motor CO
26. Zephry Textile Ltd 42. Gandara pak ltd
27. Indus dying industries 43. Bestway Cement ltd
28. Sham Textile 44. Dadex
29. Bhanero Textile mills 45. Cherat Cement Ltd
46. Kohat Cement
30. Pakages
47. Maple leaf Cement factory Ltd
31. Siemens
48. pioneer Cement
32. Tri pack
49. Power Cement
33. Byco petroleum
50. Attock Cement Pakistan Ltd
34. Mari petroleum
51. Dawood Hercules
35. Pakistan petroleum
52. Engro Corporation
36. Shell Pakistan
53. Ittehad Chemicals Ltd
37. Oil & Gas Devel XD
54. Southern Electric power company Ltd
38. Century paper 55. Hino Pak Motors
56. Pakistan Cables
39. Security paper
57. Philips Electric company
40. Atlas Honda Ltd

LIST OF NON DERIVATIVE USER COMPANIES

1. Mirza sugar 24. Hafiz Textile mill

2. Mehran sugar 25. J textile
3. J.D.W sugar 26. Resham Textile ltd
4. Adam sugar 27. Kohinoor Industries ltd
5. Chashma sugar 28. Gulistan Mills
6. pangrio sugar mill 29. Eco Pack Ltd
7. Al noor sugar mill 30. Ghani gas limited
8. Mirpur khas sugar mill 31. Merit packaging limited
9. National foods 32. Hum network
10. Noon sugar mill 33. Pak datacom
11. Clover Pakistan 34. Attock petrol
12. Habib Sugar mill 35. Attock refinery
13. Tariq Glass ind 36. Burshane LPG XD
14. Feroz industries 37. P.S.O
15. Zulfikar industries ltd 38. Pakistan Refinery
16. Wazir Ali industries ltd 39. Pakistan oilfields
17. Colgate Palmolive Pakistan 40. Sui Northern Gas Ltd
18. Unilever Pakistan ltd 41. Agri Auto Industries
19. Dost steel 42. Atlas Battery
20. Din textile 43. Exide Pak
21. Fazal cloth 44. Fauji Cement
22. Mehmood Textile ltd 45. Danto Cement
23. ZIL Textile Ltd 46. Gharibwal cement
47. Honda Atlas Car 56. Bal Wheel ltd
48. Arif Habib Ltd 57. General tyre ltd
49. Nimir Ltd 58. PTCL
50. Biafo Industries Ltd 59. Pak Tobacco
51. Fauji Fertilizer bin Qasim 60. Shezan
52. Bolan Casting Ltd 61. Murree
53. Sazgar Engineering 62. PIA
54. PVC Ltd 63. Ittehad Chemicals Ltd
55. Wahh nobel