An Assessment of the effect of derivatives on firm value and performance geared towards the development of the Philippines derivatives market: The study on Malaysian publicly listed firms between 2008 and 2012

Derivatives exchanges mark development of national financial sectors. Thus, Asian countries such as Malaysia, Singapore and Indonesia have already developed their own markets for derivatives. The Philippines began following suit by expanding its own financial sector. With that, this paper studied the use of derivatives for hedging and speculative purpose of Malaysian Banks and Malaysian Non-Banking Financial Institutions and the impact of such derivatives usage on both the firm value and firm performance of the population for a five-year period from 2008 to 2012. Given that there is no active market in the Philippines yet, these Malaysian companies serve as benchmark for the Philippine companies that will engage in the future Philippine derivatives exchange. Panel data regression was used to determine the relationship between derivatives exchange. Panel data regression was used to determine the relationship between derivative-based ratios (independent variables such as Net Derivative Assets/Firm Leverage, Net Derivative Assets/Firm Capital, Net Derivative Liabilities/Firm Age etc.) with financial ratios that represent firm value and firm performance (dependent variables such as Return on Equity, Earnings Per Share, Profit Margin, Ect.). As per the results yielded by the study, a majority of the pairings of independent and development variables proved to have no correlation with each other. However, in cases where actual correlations did exists between the independent and dependent variables, the study has determined that, in general, derivatives usage has a positive relationship with firm value and firm performance. Specifically, the researchers have found that no correlation exists between derivatives usage and certain firm value ratios, namely: price/earnings and price/cash flow ratio. This makes the enterprise value a firm value indicator which displayed mixed results - wherein net derivative asset ratios (NDA/FL and NDA/FC) have a positive correlation with EV while the other derivative-based ratios have no correlation with such. MPPS had a positive correlation only with NDA/FA. Regarding firm performance ratios, however, the results varied greatly. Basic earning power had a positive correlation with NDA/FL, a negative correlation with NDA/FC, and no correlation with the other derivative-based ratios. Earnings per share exhibited a positive correlation was established with NDA/FC, NDA/FA, and NDL/FC – specifically with the entities using derivatives for hedging purposes, as the fixed effects model concluded. Other derivative-based ratios had no correlation with EPS. Operating margin is positively correlated with NDA/FL and NDA/FC, negatively correlated with NDL/FC it has no correlation with the rest. ROE is positively correlated with NDA/FC, NDA/FA and NDL/FA, but was positively correlated with the other derivative-based ratios. Finally, whether derivatives are for hedging or speculation produced no correlation with firm value. However, there is a positive correlation using derivatives for either hedging or speculation with firms performance ratios namely, BEP, EPS, OM ROE and PM