The Security Price Impact on Firms Utilizing Derivatives Across Industries
The purpose of this study is to shed light on the link between the information content of accounting earnings on security returns in the presence of derivatives within firms. To accomplish this, a study sample was chosen from years 2011-2015 which included firms within eight separate industries. The sample was partitioned by firms which engage in derivatives and firms which do not. Results indicate that firms that do not utilize derivatives have a resultant average security price change that is almost double that of their derivative using counterparts. Also, the variance in the stock movements for non-derivative firms is approximately half of that for the derivative firms studied, indicating the potential for less risk in the non-derivative firms. Also, analysis shows that industry membership may in fact have some bearing on stock price of firms that utilize derivatives. Accounting earnings of derivative-using firms in high growth industries seem to have a greater impact on security prices whereas for those derivative-using low growth firms, the security price impact of accounting earnings is not significant. It may well be that the upside of significant growth outweighs the potential downside of derivative usage in the minds of the investors when it comes to high growth industry firms.
