Value‐relevance of foreign‐exchange and interest‐rate derivatives disclosure

Abstract

PurposeThis paper aims to examine the state of risk management practices among Malaysian listed firms and evaluates the value‐relevance of the notional amount of foreign‐exchange and interest‐rate derivatives (FCDs) used by listed firms over the period 2003‐2007.Design/methodology/approachApplication of linear regression framework.FindingsIt is found that a few Malaysian firms hedge market risks. Firms in the plantation, industrial product, trading services, and consumer products manufacturing sectors are the main users of the FCDs in Malaysia. There is a significant positive correlation between total earnings and the use of derivatives. The findings seem to suggest that although disclosed notional amount of the derivatives have value‐relevance but its contribution to a firm's valuation is very minimal in Malaysia compared to other countries.Practical implicationsThe findings imply that those investors who have investment in those firms who use derivatives to hedge against foreign currency and interest risks benefit, albeit marginally. At present, most of the Malaysian firms are either cautious or unsure about the use of derivative instruments. There is a need to inform managers about usefulness of the derivatives and market risk reporting that would contribute to greater financial transparency.Originality/valueThe author believes that this is the first study to provide survey findings on the use of derivatives instruments and their value‐relevance in Malaysia.