., Fenny
(2020)
Derivatives usage and corporate value on palm oil companies: Moderating roles of corporate governance and business sustainability initiatives.
[Dissertation (University of Nottingham only)]
Abstract
Despite the well-established theories pertaining to derivatives use and corporate value, yet the critical question is whether the use of derivatives instruments provides added value for firms. The empirical literature in this area of study has been inconclusive. While prior studies involved non-financial firms and some specific industries (oil and gas, airline, mining, utilities) as their samples, this study complements the literature by exploring palm oil industry, as it has been noted that this industry is distinguished by its rising demand in the market, yet the price of its commodity has declined substantially. Furthermore, social and environmental issues have been greatly debated in this industry in the context of business sustainability and sustainable development. At the same time, the use of derivatives should be unremarkable as palm oil businesses deal with export, they are exposed to the movement in foreign currency exchange rate. In addition, the industry also encounters frequent price fluctuation in the commodity of palm oil. Therefore, this brings upon the question on how prevalence the use of derivatives in creating value for the palm oil firms.
The main objective of this study is to examine the direct effect of derivatives use on corporate value in the global palm oil industry covering from 2009 to 2018. As the study on the interaction among variables is relatively rare, specifically, this study also examines the interactive effect of corporate governance in the association between derivatives usage and corporate value. It also incorporates business sustainability initiative as another interactive variable as this is an important factor in the oil palm industry.
This study illustrates that the use of derivatives and firm value are positively related to hedging with a premium of 9.7%. Notably, board size, insider ownership, CEO duality, and CEO age are negatively moderating the association between derivatives use and corporate value. Additionally, board independence exhibits positive association towards corporate value when it is interacted with derivatives use. Meanwhile, business sustainability negatively moderates the association between derivatives use and ROA, but it is insignificant in the Tobin’s Q model. Results are shown to be robust when alternative approaches are applied. Overall, this study presents evidence that corporate governance and business sustainability initiatives play important roles as interactive variables in the relationship between derivatives use and corporate value. Finally, the findings are particularly beneficial for managers, investors, and policy makers in making evaluations and further decisions in using derivatives.
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