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State ownership and the risk‐reducing effect of corporate derivative use: Evidence from China
Author(s) -
Guo Huimin,
Pan Zheyao,
Tian Gary Gang
Publication year - 2021
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12510
Subject(s) - business , china , derivative (finance) , state ownership , inefficiency , risk management , monetary economics , finance , economics , market economy , emerging markets , political science , law
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 risk‐reducing 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.