Exploring factors affecting the proper use of derivatives : an empirical study with active users and controllers of derivatives

Abstract

The purpose of this paper is to investigate factors that safeguard or hinder the proper use of derivatives, with evidence from active users and controllers of derivatives. Design/methodology/approach; An online panel of 420 users and controllers of derivatives responded to a self‐report questionnaire that was purposely designed for the present study. Exploratory factor analysis was used to guide scale construction and the resulting factor scores were examined overall and across four demographic variables (gender, experience, education, position held with firm). Findings; Factor analysis provided support for the five hypothesised dimensions of proper derivative usage: Risk management controls; Misuse; Expertise; Perception; and Benefits. Summary statistics of the factor scores revealed that the respondents agree that: they are giving proper attention to risk management controls; factors such as greed, politics, inappropriate standards and inadequate controls encourage misuse; they are capable of dealing with derivatives even in complex situations; derivatives are valuable financial instruments; and they are aware of the benefits derivatives provide to firms, when properly handled. However, some respondents reported contrasting views while the respondents' education, position held and experience with derivatives produced a significant impact on the factor scores. The implications of the findings are discussed. Originality/value; This study provides a better understanding and assessment of five factors that affect the proper use of derivatives and addresses practical recommendations aimed at ensuring that the true values and qualities of the derivative instrument are not obscured.