How does the use of derivatives affect investment performance, risk, and firm value? Evidence from the U.S. real estate investment trust (REIT) industry.

摘要

Derivative instruments have become an increasingly important alternative used by institutions to manage their financial risk exposure in an era with highly volatile exchange rates, interest rates, and commodity prices (Bodnar, 1995). While the classic Modigliani-Miller (M-M) model seemed to have proved that hedging with derivatives should be irrelevant in a world with no market frictions and perfect capital markets (Modigliani and Miller, 1958), many researchers have since documented that such hedging is, in fact, a significant part of risk management that is related to financial performance, risk profiles, and firm values.;The literature regarding hedging and its effects is rich but, so far, inconclusive, especially when it comes to specific industries. This dissertation contributes to our understanding of derivative hedging using the most recent data for the U.S. real estate investment trust (REIT) industry. As documented, more than fifty percent of REITs in the sample use derivatives every year within 2005-2012. And, among the users, more than eighty percent of them use interest rate swaps every year.;The dissertation includes two major components. In the first, both univariate and multivariate analyses are applied to empirically test important hypotheses about the effects of hedging by REITs. The results suggest that the decisions regarding whether or not to use derivatives or how much derivatives to use are not significantly related with improvement of financial performance. REITs that hold derivatives lose money from their hedging activities due to the dramatic drop in interest rate after mid-2007, thus causing significant decreases in net income. Moreover, using derivatives may incur other costs, and induce risk exposure to other financial instruments, and hence extends, rather than reduces, the risk. After taking debt into consideration, hedging activities do not really reduce any type of risk. And what is worse is that the market considers using derivatives as risk-taking activities after the financial crisis, thus discounting the market value of those REITs that do engage in hedging, and leading to significantly lower firm values for them.;The second part focuses on the determinants of a REIT's hedging decision using Heckman's two-stage model to separate the determinants of the decision to hedge from the extent of hedging. I find managerial risk aversion as an important determinant of both the likelihood and extent of derivative use by REITs. I also find that the debt ratio and variable-debt ratio is positively related to the probability of hedging, which is evidence to support the financial distress costs hypothesis. In my analysis, I find that the underinvestment costs hypothesis does not hold, as REITs tend to move from investing in derivatives to riskier assets to look for more excess returns for shareholders because of the low cost of financing through debt after the financial crisis.