Currency Derivatives in German Non-financials: Empirical Evidence on Theoretical Approaches

Abstract

According to the wellknown results of Modigliani and Miller, corporate risk management is redundant in perfect capital markets. By constructing models of a more realistic setting of imperfectness using different information and transaction costs, such as those related to agency and insolvency problems, taxes and exposure, several authors justify the use of derivative instruments on the corporate level. Based on annual reports of German public non-financial corporations 1998, simple proxies for measuring the connection of theory and the use of currency derivatives are established and tested. In a line with evidence from US corporations reported by e.g. (1997), transaction cost-related arguments are quite important, although company size is not a determinant of the decision whether to use currency derivatives or not. Also, leverage and growth options show some significance by hinting at a benefiting use of derivatives to reduce underinvestment problems.