Determinants of Derivatives in China

Published: 01-07-2021| Version 1 | DOI: 10.17632/pxmhp33ky3.1
Contributors:
Bruce Morley,

Description

The data is from the manufacturing firms in the Shenzhen stock market and is a panel data set. The research assesses the main determinants of the use of foreign exchange derivative use in China. The dependent variable is binary, taking the value of 1 if derivatives are used in a particular year and by a specific firm, 0 otherwise. The determinants include foreign business, measures of asymmetric information and agency problems as well as the main firm characteristics. The firm data is taken from the Wind database. The main findings are that foreign business is the main determinant of derivative use, with some evidence of a non-linear relationship. Apart from size, most firm specific characteristics are not significant.

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The data is taken from the Shenzhen stock exchange, one of the main markets in China. We use foreign exchange derivatives as disclosure of foreign currency derivative usage is clearer and more complete than other derivatives based on different underlying assets. We have chosen listed firms in the manufacturing industry, which is classified by the CSRC (China Securities Regulatory Commission), and collected the data related to the use of forward contracts, swaps and futures whose underlying asset is a foreign currency, from each of the company’s annual reports. Due to concentrating on the use of foreign currency derivatives, only multinational corporations (MNCs) are considered. The MNCs have been selected based on the ratio of foreign sales to total sales being greater than 10%. After excluding the firms with incomplete information and firms with extremely limited data, we obtained 316 firms’ data running from 2012 to 2017. All the accounting data has been obtained from the Wind database while the use of derivatives is hand-collected by checking the annual reports of each firm for each year.