Corporate Finance classes for doctoral studies Part 2. Jacek Mizerka Department of Corporate Finance

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1 Corporate Finance classes for doctoral studies Part 2. Jacek Mizerka Department of Corporate Finance

2 - an example The purpose is to find factors influencing the use of derivatives by non-financial Polish companies listed on the Warsaw Stock Exchange in period (308 companies from nonfinancial sector). H1: The use of derivatives is dependent on the size of a company; the larger the company, the more likely it is to use derivatives. H2: The use of derivatives is related to the probability of financial distress. The higher the probability of financial distress, the more likely the usage of derivatives. H3: Companies using derivatives have greater agency problems. Jacek Mizerka Corporate Finance 2

3 Results of the influence of derivative usage on a firm s value: 1.Positive impact: Allayannis, Weston (2001) Nelson, Moffitt, Affleck-Graves (2005) Kapitsinas (2008) Bartram, Brown, Conrad (2011) 2.Negative or only conditional impact: Guay, Kothari (2003) Jin,Jorion (2006) Khediri (2010) Jacek Mizerka Corporate Finance 3

4 Results of the influence of derivative usage on a firm s value: Search for factors influencing derivative usage by companies: 1. Size of company: Takao, Lantara (2009) Afza, Alam (2011) Sprcic (2007)- with the suggestion that the size is only the factor which has an infuence on firm s value in countries from Middle Europe 2. Financial distress: Bartram, Brown, Fehle (2009) Takao, Lantara (2009) Afza, Alam (2011) 3. Symptoms of agency relationships: Fauver, Naranjo (2010) Jacek Mizerka Corporate Finance 4

5 The approach and research methods Source of data: financial reports of non financial companies listed on the Warsaw Stock Exchange (308 companies; period: ); panel data Research methods Logit model: Derivative Usage i = α + β 1 (FIRM SIZE)) i + β 2 (RISK DEFAULT) i + β 3 (DEBT SERVICE COSTS) i + β 4 (LIQUIDITY CONSTRAINTS) i + β 5 (GROWTH OPTIONS) i + e i Jacek Mizerka Corporate Finance 5

6 Group Variable Predictions Definitions Sales Revenues. Variable means Sales LN_SAL + logarithm value of sales in each year Firm during the period size Total Assets average : Mean of Total assets LN_TA + logarithm value of assets from the year opening and year-end closing balance. Equipment in Working capital working EWC - average Total Assets average capital Default EBIT risk ROA ROA - Total assets average Assets Sales Revenues A_TURN - turnover ratio Total Assets average Jacek Mizerka Corporate Finance 6

7 Debt service costs Liquidity constraints Growth options Debt ratio Interest cover ratio + DEBrat + Liabilities average Total Assets average ICratio - Gross profit + Interest Interest Cash flow LN_CF - Logarithm of Operating Cash Flow ROS ROS - EBIT Revenues Current LIQ - Current assets ratio Current liabilities P/BV P_BV + Liabilitie s TotalAssets Price average Book value average average average It is average price of common stock in each year divided by average book value of equity. Jacek Mizerka Corporate Finance 7

8 I. II. III. IV. V. Sign Var. p-value p-value p-value p-value p-value const < *** < *** < *** < *** < *** + LN_TA < *** < *** < *** *** < *** + EWC < *** < *** < *** < *** + ROA A_TURN ** DEBrat *** *** *** + ICratio LIQ LN_CF ROS P_BV ** - Jacek Mizerka Corporate Finance 8

9 In the case of Polish companies we confirm: the positive effect of company size on the use of derivatives; the positive impact of financial distress on the use of derivatives; the agency problem does not affect the use of derivatives. Our results do not support Sprcic s hypothesis that factors affecting the use of derivatives in developed countries do not play a significant role in risk management in countries of Central and Eastern Europe Jacek Mizerka Corporate Finance 9

10 Thank you for your attention! Jacek Mizerka Corporate Finance 10