The Size Effect and Derivative Usage in Japan

Abstract

The purpose of this paper is to analyse the use of derivative financial contracts in a sample of Japanese firms. Approximately 60% of responding firms use derivatives. Hedging foreign exchange rate risk and interest rate risk are the most common purposes for the use of derivatives with foreign exchange rate forward contracts and interest rate swaps the most common derivatives used. Evidence of a firm size effect with derivatives use is also found. We postulate that the size effect is driven by a greater perceived range of risk exposures faced by larger firms. Also, we do not find sufficient statistical evidence to conclude that information asymmetry is a determining factor in the use of derivatives for hedging in Japan.