The size effect and derivative usage in Japan

Abstract

There is a lack of published research ( especially in English) into the use of derivative financial contracts in Japan. The purpose of this paper is to help fill this void by analysing the use of derivative financial contracts in a sample of Japanese firms Approximately 60% of responding firms use derivatives. Hedging foreign exchange rate risk and interest rate risk are the most common purposes for the use of derivatives with foreign exchange rate forward contracts and interest rate swaps the most common derivatives used. Evidence of a firm size effect with derivatives use is also found. We postulate that the size effect is driven by a greater perceived range of risk exposures faced by larger firms and that derivatives are used by these firms for hedging to manage the broader range of risks. We do not find sufficient statistical evidence to conclude that information asymmetry is a determining factor in the use of derivatives for hedging in Japan.