Linking Country Governance Quality and Derivatives Use: Insights from Firms’ Hedging Behavior in East Asia

Abstract

This paper examines the link between countries’ governance quality and fims’ use of derivatives using a novel hand-collected dataset. Our panel data includes 881 non-fiancial fims across eight East Asian countries. We found that better country governance induces fims to use derivatives to hedge exposure and mitigate costs. Firms in countries with weak governance use derivatives for speculative and/or selective hedging or self-management purposes. Overall, our fidings provide strong evidence of the role of countries’ governance quality in driving fims’ derivatives-related behaviors. This macro-based effct on derivatives use is independent of fim-specifi factors, which are frequently invoked by hedging theories.