State ownership and the risk‐reducing effect of corporate derivative use: Evidence from China

Huimin Guo, Zheyao Pan*, Gary Gang Tian

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

Using hand-collected derivative use data on publicly listed firms in China, we document that derivative use has a significant risk-reducing effect, but this effect is 40% weaker in state-owned enterprises (SOEs) than in non-SOEs. We also find that soft budget constraints and information transmission inefficiency are two mechanisms through which state ownership impedes this risk reduction. First, financial distress reduces
the impact of the soft budget constraints, mitigating the weaker riskreducing effect of state control. Second, the risk-reducing effect of derivative use is weaker in local SOEs than in central SOEs, as the
former are subject to more information frictions than the latter. Our paper provides new information and insight into risk management effectiveness from the perspective of ownership identity.
Original languageEnglish
Number of pages42
JournalJournal of Business Finance & Accounting
Early online date20 Nov 2020
DOIs
Publication statusE-pub ahead of print - 20 Nov 2020

Keywords

  • derivative use
  • risk management
  • state ownership
  • the risk-reducing effect

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