State Street Global Advisors

Abstract: This paper presents international evidence on the use of financial derivatives for a sample of 7,292 non-financial firms from 48 countries including the United States. Across all countries, 59.8% of the firms use derivatives in general, while 43.6% use currency derivatives, 32.5% interest rate derivatives, and only 10.0% commodity price derivatives. Firmspecific factors associated with derivatives use are very similar across different countries. Some factors are associated only with specific types of derivatives. The size of the local derivatives market is an important factor determining derivatives use. Other countryspecific factors are not consistently significant. Together these results show that a wide range of factors likely determine the use of derivatives by non-financial firms thus explaining the mixed results from studies examining primarily U.S. firms. However, some of the results are unambiguously counter to theoretical predictions. Finally, we examine whether derivatives use is associated with higher firm value. We find positive valuation effects primarily for firms using interest rate derivatives.

Abstract: Theory predicts that nonfinancial corporations might use derivatives to lower financial distress costs, coordinate cash flows with investment, or resolve agency conflicts between managers and owners. Using a new database, we find that traditional tests of these theories have little power to explain the determinants of corporate derivatives usage. Instead, we show that derivative usage is determined endogenously with other financial and operating decisions in ways that are intuitive but not related to specific theories for why firms hedge. For example, derivative usage helps determine the level and maturity of debt, dividend policy, holdings of liquid assets, and international operating hedging.

Abstract: Do institutional investors sacrifice risk-adjusted returns by incorporating environmental, social, and corporate governance (ESG) considerations? The authors analyze two relatively hightracking-error global strategies constructed using ESG data—a tilt strategy and a momentum strategy and find that both model portfolios outperformed the MSCI World Index over the past eight years, while also improving the ESG profile of the portfolios. These backtested model portfolios provide an example of how institutional investors with the tolerance to take some active risk, while at the same time looking to improve the ESG profile of their portfolios on a systematic basis, can incorporate such strategies in their investment processes.