Why firms use derivatives: Evidence from Canada

This study uses corporate hedging explanations to examine observed differences in the use of derivatives by Canadian nonfinancial corporations. Our findings show that the scale, operational efficiency, and level of integration of treasury activities are important determinants for identifying Canadian and international users of derivatives. Canadian users have higher leverage and lower credit ratings than nonusers. The maturity of debt is also longer for users of derivatives, suggesting that derivatives may be used to reduce the adverse effects of wealth transfers from shareholders to bondholders. Our results provide weak support for the importance of corporate taxes on hedging decisions. We find no evidence that managerial risk aversion and ownership concentration influence corporate use of derivatives in Canada.