Assessing the use of derivatives as part of a risk-management strategy

Guay (1998, Journal of Accounting and Economics, this issue) addresses pote ntial endogeneity biases in cross-sectional studies of derivative use by ex amining derivative initiations. When derivatives are only part of a risk-ma nagement strategy, tests comparing derivative users versus non-users may be biased. One solution to this difficult problem is to examine an exogenous change in derivative use. Guay (1998) identifies a recent reduction in tran sactions costs as a potential exogenous shock to derivative use. However, i f cost reductions cannot explain derivative initiations, then his analysis may not eliminate the biases in previous research. Studies isolating altern ative exogenous changes in firms' risk management strategies may provide fu rther insights. (C) 1999 Elsevier Science B.V. All rights reserved. JEL cla ssification: G39; G32; C21.