1995 Wharton Survey of Derivatives Usage by US Non-Financial Firms
Bodnar, Gordon M., Hayt, Gregory S., Marston, Richard C., Financial Management
In November 1994, the Weiss Center for International Financial Research of the Wharton School undertook its first survey of derivatives and risk management practice by non-financial corporations in the United States. The results of that first 1994 survey were published in the Summer 1995 issue of Financial Management. This 1995 survey, sponsored by CIBC Wood Gundy, is more detailed than the survey conducted in 1994, with a broader range of questions about valuation and risk measurement and with more specific questions about the use of derivatives. As with the original 1994 survey, one of the primary objectives of the survey is the development of a database on risk management practices suitable for academic research. The survey results can be linked with the Compustat database to obtain data on industry and firm-specific characteristics of the respondents. As in 1994, the individual responses are confidential and known only to the researchers at Wharton.
I. Derivatives Usage by Size and Industry
Questionnaires were mailed in October 1995 to the same randomly selected sample of 2,000 firms used in the 1994 survey plus the remaining Fortune 500 firms not included in the 1994 sample. A total of 350 firms responded to the survey: 176 from the manufacturing sector, 77 from the primary products sector which includes agriculture, mining, and energy as well as utilities, and 97 from the service sector.
The first question in the survey asks whether firms use derivatives. Of the firms, 142 (41%) report using derivatives. Figure 1 presents the responses broken down by firm size and industry sector. Among large firms (market value greater than $250 million), 59% use derivatives. That percentage drops to 48% for medium-sized firms (between $50 million and $250 million in market value) and to only 13% for small firms (less than $50 million). By industry, derivatives usage is greatest at 48% among primary product producers. It is not surprising that such a large percentage of primary product producers use derivatives given that futures exchanges were originally established to help these firms to manage their commodity risks. A somewhat smaller 44% of manufacturing firms use derivatives. Again, this percentage should not be surprising once it is recognized that many manufacturing firms are exposed to foreign exchange risks either as exporters and importers or as firms with foreign operations. The use of derivatives drops to 29% for firms in the service sector.
Table 1. Percentage of Responding Firms That Use Derivatives Percentage of Year of Firms Using Survey Derivatives Full Sample 1994 35% 1995 41 Modified Sample(a) 1994 35 1995 39 Firms Participating in 1994 37 Both Surveys 1995 38 a Excludes new Fortune 500 firms added to sample in 1995.
We thought that it would be interesting to compare derivatives use in 1995 with 1994. After the large losses from derivatives suffered by several American firms in 1994 and 1995, it might be expected that fewer firms would use derivatives in 1995 than in 1994. Indeed, a 1995 survey by Greenwich Associates reported a decline in the use of derivatives from 61% to 51% among large US companies.(1)
However, our broad sample results suggest that derivatives use increased between the two years. Since the sample we used in 1995 included an additional set of Fortune 500 firms, we initially suspected that this result was due to the addition of larger firms who are more likely to use derivatives. A better way to compare derivatives use is to confine the comparison to the original sample of firms used in both surveys. In Table 1, we report the percentage of those firms (called the "modified sample") who use derivatives. …