Risk Management and Its Impacts on Accounting Performance and Firm Value in China

Western finance theory indicates that hedging increases firm value by reducing expected taxes, expected costs of financial distress, or other agency costs. This paper examines the use of financial derivatives for the purpose of risk management in a sample of 1151 China non-financial firms and its potential impacts on firm value and accounting performance. We find a positive relation between firm accounting performance and the use of derivatives. However, contrary to the western theories, we find a negative relation between firm value and the use of derivatives. One plausible explanation is that the side effect of derivative usage overtakes the positive effect.