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Derivatives Use, Corporate Governance, and Legislative Change: An Empirical Analysis of New Zealand Listed Companies

Authors

  • Alastair Marsden,

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      Alastair Marsden, Department of Accounting and Finance, The University of Auckland, Private Bag 92019, Auckland, New Zealand. e-mail: a.marsden@auckland.ac.nz
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  • Andrew K. Prevost

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      The authors are respectively from the Department of Accounting and Finance, the University of Auckland; and the Department of Finance, Ohio University. An earlier version of this paper was presented at the 2000 Financial Management Association meeting, Seattle. Comments from Dan Rogers and seminar participants at this conference are gratefully appreciated. The authors thank Henk Berkman and Mike Bradbury for assistance in providing part of the data for the 1994 year. This paper has also benefited from detailed comments and helpful suggestions from an anonymous referee. (Paper received March 2003, revised and accepted November 2003)


Alastair Marsden, Department of Accounting and Finance, The University of Auckland, Private Bag 92019, Auckland, New Zealand. e-mail: a.marsden@auckland.ac.nz

Abstract

Abstract:  This paper examines if board composition has any systematic bearing on derivatives usage by New Zealand listed companies. We also test if derivative usage changed following the introduction of the new 1993 Companies Act. The Act raised expectations of directors’ fiduciary responsibilities and the perceived risk of liability on outside directors for poor investment decisions. Using a dataset of listed New Zealand companies in 1994 and 1997, we find companies with higher growth opportunities and a greater proportion of outside directors were less likely to use financial derivatives following the introduction of the new Act. Our results supplement the US-based literature on derivatives usage by illustrating that internal governance mechanisms can play a role in corporate derivatives policy, and that the legislative and regulatory environment may affect this role.

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