The value relevance of derivatives for South African listed companies

Abstract

This study investigates the use of derivatives by firms listed on the Johannesburg Stock Exchange (JSE) during 2005 to 2017, and the disclosure of derivative financial instruments on the financial statements of these entities. The study can be broadly divided into two parts: the first part investigates the determinants of corporate hedging practices by JSE-listed firms, while the second part analyses the value relevance of derivatives disclosures. The first part of the study thus answers the question ‘Why do companies use derivatives?’ with reference to JSE-listed companies for the period 2005 to 2017. The second part of the study answers the question ‘Does the disclosure of derivatives in the financial statements have an impact on firm value?’ for the same companies and period.

Binomial logistic regression analyses were done to assess the determinants of the corporate hedging practices employed by JSE-listed firms. Multiple linear regression analyses were used to determine the value relevance of derivatives disclosures.

The results of the study suggest that firm size, growth prospects, leverage and managerial risk aversion are important determinants of JSE-listed firms’ hedging decisions. Furthermore, the findings suggest that the disclosure of firms’ use of derivatives in the financial statements is value relevant and that companies listed on the JSE are associated with a higher Tobin’s Q if they disclose a derivatives amount.

This study also investigates whether the value relevance of derivatives disclosure is influenced differently under different conditions during different economic periods and whether the level of quality of the disclosure influences the value relevance of derivatives disclosure. The data show that the value relevance of risk disclosure companies depend on different economic periods, and that the level of higher quality risk disclosure has a negative impact on the value relevance of derivatives disclosures: firms are valued lower where the level of quality of derivatives disclosures is higher.