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HOW DOES THE USE OF DERIVATIVES AFFECT FIRMS’ FINANCIAL PERFORMANCE IN TURKISH NON-LIFE INSURANCE INDUSTRY?

Year 2021, , 117 - 128, 20.10.2021
https://doi.org/10.29228/JORE.6

Abstract

However, due to the ever-changing conditions in the financial markets, these instruments have further been used for speculative purposes and arbitrage opportunities. Nevertheless, this paper focuses on the influence of derivative usage for hedging purposes on the profitability of firms in the Turkish nonlife insurance industry. The data consists of 25 non-life insurance companies operating in Turkey from 2009 to 2019, inclusive. The findings based on panel data analysis reveal that derivative usage contributes to the firms’ financial performance measured by return on assets (ROA) in that firms that use derivatives demonstrate a 5% higher ROA figure in comparison to non-users.

References

  • Allayannis, G., Lel, U., and Miller, D. (2012). The use of foreign currency derivatives, corporate governance, and firm value around the world. Journal of International Economics, 65-79.
  • Bachelier, L. (1900). Théorie de la spéculation. Annales scientifiques de l’É.N.S, 21-86.
  • Bartram, S., Brown, G., and Fehle, F. (2009). International Evidence on Financial Derivative Usage. Financial Management, 185-206.
  • Bronzin, V. (1908). Theorie der prämiengeschäfte.
  • Brown, G., Crabb, P., and Haushalter, D. (2006). Are Firms Successful at Selective Hedging? The Journal of Business, 2925-2949.
  • Buse, A. (1982). The Likelihood Ratio, Wald, and Lagrange Multiplier Tests: An Expository Note. The American Statistician, 153-157.
  • Chance, D. (1998). A brief history of derivatives. Essays in Derivatives: Risk-Transfer Tools and Topics Made Easy.
  • Chanzu, L. N., and Gekara, M. (2014). Effects of use of derivatives on financial performance of companies listed in the Nairobi Security Exchange. International Journal of Academic Research in Accounting, Finance and Management Sciences, 4(4), 27-43.
  • Choi, J., Mao, C., and Upadhyay, A. (2013). Corporate risk management under information asymmetry. Journal of Business Finance and Accounting, 239-271.
  • Colquitt, L. L., and Hoyt, R. E. (1997). Determinants of corporate hedging behavior: Evidence from the life insurance industry. Journal of Risk and Insurance, 649-671.
  • Cummins, J. D., Phillips, R. D., and Smith, S. D. (1997). Corporate hedging in the insurance industry: the use of financial derivatives by US insurers. North American Actuarial Journal, 1, 13-40.
  • Cummins, J. D., Phillips, R. D., and Smith, S. D. (2001). Derivatives and corporate risk management: participation and volume decisions in the insurance industry. Journal of Risk and Insurance, 68, 51-91.
  • De Ceuster, M., Flanagan, L., Hodgson, A., and Tahir, M. I. (2003). Determinants of derivative usage in the life and general insurance industry: The Australian evidence. Review of Pacific Basin Financial Markets and Policies, 6(4), 405-431.
  • Elango, B., Ma, Y., and Pope, N. (2008). An Investigation Into the Diversification–Performance Relationship in the U.S. Property-Liability Insurance Industry. Journal of Risk and Insurance, 567-591.
  • Fauver, L., and Naranjo, A. (2010). Derivative usage and firm value: The influence of agency costs and monitoring problems. Journal of corporate finance, 16(5), 719-735.
  • Graham, J., and Roger, D. (2002). Do firms hedge in response to tax incentives? Journal of Finance, 815-839.
  • Hardwick, P., and Adams, M. (1999). The determinants of financial derivatives use in the United Kingdom life insurance industry. Abacus, 35(2), 163-184.
  • Haug, E. G. (2009). The History of Option Pricing and Hedging. In H. W., and Z. H., Vinzenz Bronzin’s Option Pricing Models (pp. 471-486). Springer, Berlin, Heidelberg. doi:https://doi.org/10.1007/978- 3-540-85711-2_23
  • Lau, C. (2016). How corporate derivatives use impact firm performance? Pacific-Basin Finance Journal, 102-114.
  • Lee, H., and Lee, C. (2012). An analysis of reinsurance and firm performance: evidence from the Taiwan property-liability insurance industry. The Geneva Papers on Risk and Insurance, 467-484.
  • Ma, Y., and Elango, B. (2008). When do international operations lead to improved performance? An analysis of property-liability insurers. Risk Management and Insurance Review, 141-155.
  • Said, A. (2002). Does the Use of Derivatives Impact Bank Performance? A Case Study of Relative Performance during 2002-2009. A case study of relative performance during, 2009, 77-88.
  • Shapiro, S. S. and Wilk, M. B. (1965) An analysis of variance test for normality (complete samples). Biometrika,52, 591–611.
  • Shiu, Y. M. (2007). An empirical investigation on derivatives usage: evidence from the United Kingdom general insurance industry. Applied Economics Letters, 14(5), 353-360. doi:10.1080/135.048.50500426319
  • Shiu, Y. M. (2020). How does reinsurance and derivatives usage affect financial performance? Evidence from the UK non-life insurance industry. Economic Modelling, 88, 376-285. doi:https://doi.org/10.1016/j. econmod.2019.09.048
  • Tatoğlu, F. Y. (2020). Panel veri ekonometrisi. Beta Yayınevi.
  • Weisenthal, J. (2012, March 5). The Story Of The First-Ever Options Trade-In Recorded History. Retrieved January 4, 2021, from Business Insider: https://www.businessinsider.com.au/the-story-of-the-firstever- options-trade-in-recorded-history-2012-3
  • White, H. (1980). A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity. Econometrica, 817-838.
  • Yang, J., Davis, G. C., and Leatham, D. J. (2001). Impact of interest rate swaps on corporate capital structure: an empirical investigation. Applied Financial Economics, 11, 75-81.
Year 2021, , 117 - 128, 20.10.2021
https://doi.org/10.29228/JORE.6

Abstract

References

  • Allayannis, G., Lel, U., and Miller, D. (2012). The use of foreign currency derivatives, corporate governance, and firm value around the world. Journal of International Economics, 65-79.
  • Bachelier, L. (1900). Théorie de la spéculation. Annales scientifiques de l’É.N.S, 21-86.
  • Bartram, S., Brown, G., and Fehle, F. (2009). International Evidence on Financial Derivative Usage. Financial Management, 185-206.
  • Bronzin, V. (1908). Theorie der prämiengeschäfte.
  • Brown, G., Crabb, P., and Haushalter, D. (2006). Are Firms Successful at Selective Hedging? The Journal of Business, 2925-2949.
  • Buse, A. (1982). The Likelihood Ratio, Wald, and Lagrange Multiplier Tests: An Expository Note. The American Statistician, 153-157.
  • Chance, D. (1998). A brief history of derivatives. Essays in Derivatives: Risk-Transfer Tools and Topics Made Easy.
  • Chanzu, L. N., and Gekara, M. (2014). Effects of use of derivatives on financial performance of companies listed in the Nairobi Security Exchange. International Journal of Academic Research in Accounting, Finance and Management Sciences, 4(4), 27-43.
  • Choi, J., Mao, C., and Upadhyay, A. (2013). Corporate risk management under information asymmetry. Journal of Business Finance and Accounting, 239-271.
  • Colquitt, L. L., and Hoyt, R. E. (1997). Determinants of corporate hedging behavior: Evidence from the life insurance industry. Journal of Risk and Insurance, 649-671.
  • Cummins, J. D., Phillips, R. D., and Smith, S. D. (1997). Corporate hedging in the insurance industry: the use of financial derivatives by US insurers. North American Actuarial Journal, 1, 13-40.
  • Cummins, J. D., Phillips, R. D., and Smith, S. D. (2001). Derivatives and corporate risk management: participation and volume decisions in the insurance industry. Journal of Risk and Insurance, 68, 51-91.
  • De Ceuster, M., Flanagan, L., Hodgson, A., and Tahir, M. I. (2003). Determinants of derivative usage in the life and general insurance industry: The Australian evidence. Review of Pacific Basin Financial Markets and Policies, 6(4), 405-431.
  • Elango, B., Ma, Y., and Pope, N. (2008). An Investigation Into the Diversification–Performance Relationship in the U.S. Property-Liability Insurance Industry. Journal of Risk and Insurance, 567-591.
  • Fauver, L., and Naranjo, A. (2010). Derivative usage and firm value: The influence of agency costs and monitoring problems. Journal of corporate finance, 16(5), 719-735.
  • Graham, J., and Roger, D. (2002). Do firms hedge in response to tax incentives? Journal of Finance, 815-839.
  • Hardwick, P., and Adams, M. (1999). The determinants of financial derivatives use in the United Kingdom life insurance industry. Abacus, 35(2), 163-184.
  • Haug, E. G. (2009). The History of Option Pricing and Hedging. In H. W., and Z. H., Vinzenz Bronzin’s Option Pricing Models (pp. 471-486). Springer, Berlin, Heidelberg. doi:https://doi.org/10.1007/978- 3-540-85711-2_23
  • Lau, C. (2016). How corporate derivatives use impact firm performance? Pacific-Basin Finance Journal, 102-114.
  • Lee, H., and Lee, C. (2012). An analysis of reinsurance and firm performance: evidence from the Taiwan property-liability insurance industry. The Geneva Papers on Risk and Insurance, 467-484.
  • Ma, Y., and Elango, B. (2008). When do international operations lead to improved performance? An analysis of property-liability insurers. Risk Management and Insurance Review, 141-155.
  • Said, A. (2002). Does the Use of Derivatives Impact Bank Performance? A Case Study of Relative Performance during 2002-2009. A case study of relative performance during, 2009, 77-88.
  • Shapiro, S. S. and Wilk, M. B. (1965) An analysis of variance test for normality (complete samples). Biometrika,52, 591–611.
  • Shiu, Y. M. (2007). An empirical investigation on derivatives usage: evidence from the United Kingdom general insurance industry. Applied Economics Letters, 14(5), 353-360. doi:10.1080/135.048.50500426319
  • Shiu, Y. M. (2020). How does reinsurance and derivatives usage affect financial performance? Evidence from the UK non-life insurance industry. Economic Modelling, 88, 376-285. doi:https://doi.org/10.1016/j. econmod.2019.09.048
  • Tatoğlu, F. Y. (2020). Panel veri ekonometrisi. Beta Yayınevi.
  • Weisenthal, J. (2012, March 5). The Story Of The First-Ever Options Trade-In Recorded History. Retrieved January 4, 2021, from Business Insider: https://www.businessinsider.com.au/the-story-of-the-firstever- options-trade-in-recorded-history-2012-3
  • White, H. (1980). A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity. Econometrica, 817-838.
  • Yang, J., Davis, G. C., and Leatham, D. J. (2001). Impact of interest rate swaps on corporate capital structure: an empirical investigation. Applied Financial Economics, 11, 75-81.
There are 29 citations in total.

Details

Primary Language English
Subjects Economics
Journal Section Makaleler
Authors

Burak Alan 0000-0002-3878-8273

Aslı Aybars This is me 0000-0002-7899-2367

Publication Date October 20, 2021
Published in Issue Year 2021

Cite

APA Alan, B., & Aybars, A. (2021). HOW DOES THE USE OF DERIVATIVES AFFECT FIRMS’ FINANCIAL PERFORMANCE IN TURKISH NON-LIFE INSURANCE INDUSTRY?. Journal of Research in Economics, 5(2), 117-128. https://doi.org/10.29228/JORE.6