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Do Derivatives Instruments
Ownership Decrease Firm
Value in Indonesia?

Amrie Firmansyah, Eko Bayu Dian ABSTRACT

Purnama This research aims to examine the association between derivatives
Department of Accounting, Polytechnic instruments and firm value. This research is quantitative research
of State Finance STAN with multiple linear regression models and panel data. The sample
email: amrie.firmansyah@gmail.com, employed in this research is non-financial companies listed on
bayudhiyan@gmail.com the Indonesia Stock Exchange (IDX). The type of data used in
this study is secondary data sourced from financial statements,
Keywords: stock price information, and annual reports from 2012 to 2017.
derivatives, disclosure, firm value The sample selection using a purposive sampling method with the
number of samples amounted to 246 firm-year.
The result of this study suggests that a derivatives instrument is not
associated with firm value. Investors in Indonesia do not consider
ownership of derivative instruments by companies whether those
are harmful of not for the investment impact. Also, derivatives do
not have an official market in Indonesia as well as investors also do
not understand the purpose of derivative ownership by companies.

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INTRODUCTION value. So far, studies that have examined derivative

instruments on firm value have used many
The company’s market performance, which is developed countries (Ayturk, 2016). Allayannis &
reflected in the value of the company, is considered Weston (2001) tested derivative instruments on
necessary because the significant firm value can firm value and found that derivative ownership had
reflect the high level of shareholder prosperity a positive effect on firm value. Meanwhile, Khediri
(Brigham & Ehrhardt, 2013). Company value (2010) tested derivative instruments for foreign
is strongly influenced by the company’s stock exchange hedges and interest rate hedges not
market price (Nuswandari, 2009). Fluctuations or including commodity price risk hedges. The test
fluctuations in the stock market price are influenced results found that the use of derivatives does not
by several factors, both internal and external. This affect firm value. Bartram et al. (2011) examined
information is a means of communication between the impact of the use of derivatives on firm value
investors and companies in terms of decision using a collection of non-financial company data
making by investors (Nurwandari, 2009). The from 47 countries. The study found that the use of
concept of firm value is much associated with the derivatives affects firm value. Mackay & Moeller
actual value per share that will be received if all (2007) found that risk management with derivatives
company assets are sold at market prices (Gitman, can increase company value.
2006). Therefore, investors will react to information Research examining the effect of derivative
received related to company conditions that are instruments in developing countries is very
reflected in stock prices. The company’s market limited because it is possible because of limited
performance is different from the company’s data. Berrospide et al. (2008) found that the use of
operating performance because the company’s derivative instruments had a positive effect on firm
market performance can be influenced by internal value in Brazil. Aretz & Bartram (2010) found that
factors related to the company’s fundamental operational hedges and hedges on foreign currency
conditions and external factors related to investor debt have a positive effect on firm value. Magee
sentiment. (2009) reexamined the use of foreign currency
In the framework of agency theory, investors derivatives and company value for U.S. non-
do not necessarily trust the information provided financial companies. The study found that the use
by companies in the form of financial statements. of derivatives did not affect firm value. Ayturk et al.
Therefore, the quality of information reflected in the (2016) found that the use of derivative instruments
financial statements can affect investors’ responses did not affect firm value.
to policies taken either reflected in disclosures Testing the ownership of derivative
or based on other information. In this regard, instruments on firm value using company data
one of the information disclosed by companies in Indonesia has been carried out in previous
through financial statements is information on the studies,but is still relatively rare. Oktavia (2011)
ownership of derivative instruments. Ownership concluded that ownership of derivatives did
of derivative instruments can be used for hedging not affect the value tested against the firm
purposes or speculative purposes. Derivatives with value. The study uses the financial statements of
the purpose of hedging are generally carried out telecommunications sub-sector companies. Test
by companies for risk management related to the results in the study prove that hedging does not
company’s business activities. Many companies affect firm value. Also, Frensidy & Mardhaniaty
have implemented a risk management system (2019) uses derivative instruments for hedging
through the use of derivative instruments accurately company value. The study divides derivatives to
to hedge intensively to manage the company’s hedge for foreign currency risk, interest rate risk
financial risk (Ayturk et al., 2016). and risk for commodity prices. The results of the
In previous studies, the use of derivative study prove that only hedges for foreign currency
instruments has been associated with risk risk have a positive effect on firm value, but hedges
management carried out by companies (Ayturk et for interest rate risk and risks for commodity prices
al., 2016). Therefore, it is essential to know about do not affect company value. Meanwhile, Ahmad
testing the effect of derivative instruments on firm et al. (2018) tested a derivative instrument with the
aim of hedging as a moderating variable in testing
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the effect of profitability, company size, growth, Riny, 2018; Suroto, 2018; Utomo, 2016), Company
leverage, dividends, and liquidity. The test results Size (Ahmad et al., 2018; Arifianto & Chabachib,
prove that the derivative instrument reduces the 2016; Hartina, 2019; Hidayat, 2018; Indriyani, 2017;
positive effect of profitability on firm value, but it Lumoly et al., 2018; Rahayu & Sari, 2018; Riny, 2018;
does not succeed in moderating other independent Suroto, 2018; Utomo, 2016), Growth (Ahmad et al.,
variables on firm value. 2018; Dhani & 2017, Suryandani, 2018), Leverage
Based on the inconsistency of the results of (Ahmad et al., 2018; Arifianto & Chabachib, 2016;
previous studies, this study aims to test the derivative Dhani & Utama, 2017; Haryono et al., 2015; Hartina,
instruments on firm value. The difference between 2019; Hidayat, 2018; Kholis et al. , 2018; Lubis et
this research and Oktavia (2011) is that the proxy al., 2018; Rahayu & Sari, 2018; Riny, 2018; Suroto,
used by Oktavia uses a notional amount proxy, while 2018; Utomo, 2016), Dividends (Ahmad et al., 2018;
this study uses derivative instruments conducted by Suroto, 2018), Price Earnings Ratio (Arifianto &
Oktavia & Martani (2013) by using the fair value of Chabachib , 2016), CSR Disclosures (Utomo, 2016),
the absolute value of the difference in the value of Liquidity (Ahma d et al., 2018; Lubis et al., 2018;
derivative assets to the value of derivative liabilities. Lumoly et al., 2018; Riny, 2018), Earnings Quality
However, in this study Oktavia & Martani (2013) (Oktavia, 2011; Rahayu & Sari, 2018), Institutional
examined the effect of disclosure of derivative Ownership (Haryono et al., 2015).
transactions on tax avoidance. Ayturk et al. (2016) Furthermore, this study also includes control
state that according to the hedge accounting rules variables, namely financial leverage, liquidity, the
in IFRS, companies must recognize changes in the book to market ratio, and company size. Financial
fair value of derivatives as assets, liabilities or equity leverage is closely related to company policy in
in each financial reporting period. It is relevant to choosing capital structure using debt. Financial
PSAK 55 (IAI, 2017) and PSAK 60 (IAI, 2017). leverage testing of the company’s value has been
The data used in this study uses data sourced carried out, among others, by Ahmad et al. (2018),
from the financial statements of non-financial Dhani & Utama, (2017), Hertina (2019), Hidayat
companies listed on the Indonesia Stock Exchange (2018), Kholis et al. (2018), Lubis et al. (2018),
starting in 2012, which is the year of adoption Rahayu & Sari (2018), Riny (2018) and Suroto
of IFRS in Indonesia until 2017. Non-financial (2018). Liquidity The liquidity ratio is related to the
companies use derivatives with the purpose of company’s operating performance which measures
hedging due to the existence of high potential the extent to which cash flow from operating
risk exposure associated with commodity prices, activities can guarantee the company’s current
interest rates and exchange rates (Bartram et al., liabilities (Rajgopal & Venkatachalam, 2011). The
2011). Therefore, non-financial companies that higher cash flow from operating activities can
use derivative instruments with the aim of hedging guarantee the company’s current liabilities that are
should have a motive in reducing company risk. due. Liquidity testing of company value has been
On the other hand, Kwong (2016) and Huang et carried out by Ahmad et al. (2018), Lubis et al.
al. (2017) states that derivative instruments with (2018), Lumoly et al. (2018), and Riny (2018), but in
hedging purposes are only successful in developed this study using a proxy used by Khan & Bradbury
countries, so the use of derivative instruments in (2015). Book to market ratio relates to the ratio of
developing countries can increase risk. Therefore, the book value of equity compared to the market
research that examines the use of derivatives on value of equity or market capitalization of equity.
company value by using company data in Indonesia The higher the book to market ratio, the lower the
as a developing country is fundamental to do. Also, value of the company and the increased risk of
derivative testing of firm value uses Indonesian data the company. The use of the book to market ratio
because there is still rarely research in Indonesia. follows the testing of Kumari et al. (2017) although
Meanwhile, research examining the value of this research examines the book to market ratio of
companies conducted in Indonesia uses profitability company risk. Company size is related to the size of
(Ahmad et al., 2018; Arifianto & Chabachib, 2016; the company which is usually seen from the total
Dhani & Utama, 2017; Hartina, 2019; Hidayat, assets owned by the company. Testing company size
2018; Indriyani, 2017; Kholis et al. , 2018; Lubis et on firm value has been done by Ahmad et al. (2018),
al., 2018; Lumoly et al., 2018; Rahayu & Sari, 2018; Arifianto & Chabachib (2016), Hartina (2019),

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Hidayat (2018), Lumoly et al. (2018), Rahayu & Sari derivative transactions more for risk management
(2018), Riny (2018), and Suroto (2018). than for trading purposes. Companies in developed
countries are trying to reduce financial exposure
Literature Review and Hypothesis Development which can reduce the possibility of financial
distress and mitigate the problem of under-
The existence of a conflict of interest between
investment. Furthermore, Cao et al. (2018) state
agents and principals as in agency theory results
that derivative instruments used by companies even
in investors not too trusting the information
for hedging purposes, but in reality, companies that
provided by the company to the public. Disclosure
have derivatives with hedging purposes tend to
of company policies about derivative ownership
have shares that are valued too low by investors.
allows the chosen policy to be unknown to investors
Therefore, derivative transactions with the purpose
as the owner of company funds. Although some
of hedging are closely related to the degree of error
of the literature states that derivative ownership is
in the imposition of stock prices.
closely related to corporate strategy management,
according to Pincus & Rajgopal (2002) and Oktavia The use of derivative instruments in
& Martani (2013), derivative transactions are developing countries is becoming less effective
strongly related to earnings management actions. If for hedging purposes not only caused by the
investors understand this. As a result, investors will company itself. Weak institutions and governance
respond negatively to the information so that these in developing countries and derivative markets in
actions can reduce the value of the company. less liquid developing countries are external factors
that result in less effective derivative instruments if
Ayturk et al. (2016) prove that derivative
companies use them for hedging purposes. Also,
ownership cannot increase firm value. In that
the lack of investor understanding of derivative
study, derivatives are closely related to those
instruments supports information on ownership
used for hedging purposes. However, Bartram
of derivative instruments by companies which
et al. (2011) proved that ownership of derivatives
results in investment decisions that are harmful
with the purpose of hedging could increase the
to the company. Therefore, the use of derivative
value of the company. The study states that non-
transactions by companies in developing countries
financial companies that use derivative instruments
tends to be used as ordinary investment or tends
with the aim of hedging should have a motive
to be used for speculative purposes even though
in reducing company risk. On the other hand,
there are derivatives applied by companies with
Kwong (2016) and Huang et al. (2017) states that
hedging purposes. Therefore, the use of derivative
derivative instruments with hedging purposes are
transactions by companies in Indonesia can reduce
only successful in developed countries, so the use
firm value.
of derivative instruments in developing countries
can increase risk. Testing of derivative transactions H1: Derivative instruments is negatively
carried out by companies in reducing or increasing associated with firm value.
the risk of companies in developing countries
becomes interesting to do. RESEARCH METHODS
Kwong (2016) states that the use of derivatives
in developing countries tends to result in a This study uses a quantitative method
decline in the value of the company. It is due to approach, which is to test the effect of ownership
weak institutions and governance in developing of derivative instruments on firm value. In this
countries and derivative markets in less liquid study, the object of research uses companies listed
developing countries. This condition resulted on the Indonesia Stock Exchange. The population
in a lack of effectiveness of the derivatives used used in this study is non-financial companies listed
by the company. It is in line with the findings of on the Indonesia Stock Exchange. According to
Huang et al. (2017) that the use of derivatives by Bartram et al. (2011), derivative transactions for
companies in developed countries can reduce hedging purposes are usually used by non-financial
company risk. However, these findings do not companies. On the other hand, Kwong (2016) and
apply to developing countries. Huang et al. (2017) Huang et al. (2017) states that derivatives with
also found that developed countries use financial hedging purposes are only successful in developed

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countries. Also, the ownership of derivatives by non- the end of the company’s fiscal year fiscal equity,
financial companies in Indonesia is more than the and BV ASSETSit is the value book total assets of
ownership of derivatives by financial companies, so the company’s fiscal year-end. The independent
the use of data in non-financial companies allows variable in this study is a derivative instrument.
them to obtain a larger sample. Ayturk et al. (2016) state that according to the
Data was collected using the documentation hedge accounting rules in IFRS, companies must
method through the official website of the recognize changes in the fair value of derivatives
Indonesia Stock Exchange, namely www.idx.co.id as assets, liabilities or equity in each financial
and finance.yahoo.com. Information data from the reporting period. For testing the use of derivatives
financial statements used in this study uses annual designed as hedges for accounting purposes,
data. The technique in sample selection used is the fair value of derivative assets and liabilities
to use non-random sample selection techniques of derivatives designed as hedges are used. It is
(purposive sampling). First, the companies used in line to test the use of derivatives that are not
in the sample are non-financial companies that hedged for accounting purposes, the fair value of
have listed their shares on the Indonesia Stock derivative assets and liabilities of derivatives that
Exchange before January 1, 2012. Second, exclude are not hedged. PSAK 60 (IAI, 2017) requires that
financial companies from the sample because derivatives be recorded as assets or liabilities and
their asset structure and liability characteristics reported in the statement of financial position at
produce high leverage. Third, issuing non-financial fair value. In this study, the proxy used to measure
companies have incomplete financial statements, derivative transactions follows Oktavia & Martani
including information on comprehensive income (2013), namely the absolute value of the fair value
components and data needed in this study from of derivative assets reduced by derivative liabilities
the period January 1, 2012, to December 31, 2017. for both hedging and speculative purposes, which
Fourth, non-financial companies have disclosure are described as follows:
data of at least 1 type of derivative transactions
either for hedging purposes or for speculative (Nilai absolut dari nilai wajar derivatif)
DERIVit =
purposes (trading) or which have both during the (Total assetsit-1)
period January 1, 2012, to December 31, 2017. The
The control variables in this study are financial
reason is to capture accounting information from
leverage, liquidity, book to market, and company
companies both persistently and not persistently
size. In this study financial leverage as measured
in using derivatives both for hedging purposes and
by total liabilities divided by total equity each year
for speculative purposes. Based on the purposive
as used by Dhani & Utama (2017), Hidayat (2019),
sampling that has been done, the amount of data
Kholis et al. (2018), and Rahayu & Sari (2018).
that can be used in this study amounted to 41
Liquidity is measured by the ratio of operating cash
companies using 2012 to 2017, so the sample used
flow to total current liabilities each year as used by
in this study amounted to 246 observations (firm-
Khan & Bradbury (2015), that is, cash flow from
year).
operations divided by total current liabilities. Book
This study uses the firm value as a dependent to market value ratio is measured by the book value
variable. In this study, a proxy for measuring firm of equity against its market capitalization as the
value follows Ayturk et al. (2016), Ahmad et al. proxy used by Kumari et al. (2017). Furthermore,
(2018), Frensidy & Mardhaniaty (2019) using the company size proxy in this study follows Ahmad
Tobin’s Q are as follows: et al. (2018), Hartina (2019), Hidayat (2018),
BV Assetsit – BV Equityit + MV Equityit Lumoly et al. (2018), Rahayu & Sari (2018), and
Qit= Suroto (2018) as measured by the natural logarithm
BV Asssetsit
of total assets.
Where: Qit is Tobin’s Q, MV EQUITYit is the The Regression Equations in this study are as
market value of ordinary shares at the end of the follows:
company’s fiscal year, calculated as the number of TOBIN”S Qit= β0+ β1DERIVit+ β2LEVit+
outstanding ordinary shares multiplied by the share β3LIQit+ β4BTMit+ β5SIZEi
price, BV EQUITYit is the book value of equity at

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RESULTS AND DISCUSSION

Descriptive statistics in this study for all variables are as follows:

Table 1 Descriptive statistics

TOBINS Q DERIV FINLEV LIQ BM SIZE
Mean 2.4894 0.0061 1.6847 0.4452 0.9741 30.077
Median 1.3630 0.0003 1.0510 0.3436 0.5826 30.147
Maximum 23.285 0.0682 14.812 2.4673 6.8265 33.320
Minimum 0.3181 0.0000 0.1872 -0.5581 0.0121 27.589
Std. Dev. 3.4328 0.0134 1.9839 0.4599 1.1464 1.3404
Obs. 246 246 246 246 246 246
Source: Result of Data Analysis 2019

The results of testing the hypothesis are as follows:

Table 2 Hypothesis Testing Results

Variable Coefficient t-Statistic Prob.
C 8.6571 1.5550 0.0606 *
DERIVATIVES 2.6094 0.3698 0.3559
FINLEV -0.0246 -0.5206 0.3015
BM -0.2872 -3.0076 0.0014 ***
LIQ 0.3495 2.0790 0.0193 **
SIZE -0.2001 -1.0820 0.1401
R-squared 0.0682
Adj. R-squared 0.0488
F-stat. 3.5175
Prob(F-stat.) 0.0043
Source: Result of Data Analysis 2019

Also, this study examines derivative instruments both for hedging and speculative purposes for the value of
the company. The test results are as follows:

Table 3 Hypothesis Testing Results by Decomposition of Derivative Instruments with Hedging Objectives
and Speculative Objectives
Variable Coeff. t-Statistic Prob.
C 8.5913 1.5363 0.0629 *
DHEDGE -0.5527 -0.0610 0.4756
DTRADE 7.5362 0.6702 0.2517
FINLEV -0.0200 -0.4167 0.3386
LIQ 0.3357 1.9749 0.0247 **
BM -0.2875 -3.0033 0.0015 ***
SIZE -0.1977 -1.0646 0.1440
R-squared 0.0694
Adjusted R-squared 0.0461
F-statistic 2.9734
Prob(F-statistic) 0.0080
Source: Result of Data Analysis 2019

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Based on the test, results show that the allegation is the level of investor understanding of
derivative instrument does not affect the value of derivative instruments also supports information
the company. The results of this study are in line on ownership of derivative instruments by
with the findings of Oktavia (2011) and Frensidy & companies, which results in unclear investment
Mardhaniaty (2019). The results of this test prove decisions on derivative instruments for companies.
that there is no difference in investor responses to Although Huang et al. (2017) and Cao et al.
information on derivative transactions both before (2018) states the use of derivative transactions by
the adoption of IFRS and after the adoption of companies in developing countries tends to be
IFRS. Also, information on derivative transactions used as ordinary investment or tends to be used
with hedging and speculative purposes is not for speculative purposes. Although this allegation
responded to by investors. Investors might consider might be proven, it has no impact on investment
this information as information that is not useful decision making by investors in the capital market.
for investors in making investment decisions. The The results of this test can be understood that
results of this test are also in line with testing using there is no formal derivatives market and there is
other developing countries such as Magee (2009) an alleged lack of investor understanding of the
and Ayturk et al. (2016). derivative instruments owned by the company.
The results of this study differ from testing
conducted by Kwong (2016), which states that the CONCLUSION
use of derivatives in developing countries tends to
cause a decline in the value of the company. Kwong The test results in this study stated that
(2016) states that weak institutions and governance ownership of derivative instruments does not affect
in developing countries and derivative markets firm value. Information on ownership of derivative
in less developed countries can result in a decline instruments disclosed in the financial statements
in company value, but this does not happen in is not strong enough to get a response from
Indonesia. Also, the test results in this study did investors. Although in previous studies, ownership
not support the research results of Huang et al. of derivative instruments can increase or decrease
(2017), which states that the use of derivatives in the value of the company, but based on this research
developing countries is generally used for trading does not affect the company’s market performance
purposes. Also, Cao et al. (2018) state that derivative or company value.
instruments used by companies even for hedging
The results of this study only use the financial
purposes, but in reality, companies that have
statement data of non-financial companies in
derivatives with hedging purposes tend to have
Indonesia, so they cannot generalize the test results
shares that are valued too low by investors. Apart
for all companies in Indonesia, especially for
from derivatives with hedging and speculative
financial sector companies and in other developing
purposes, information on the ownership of
countries. Also, the data used in this study are
derivative instruments with any purpose is not
data on the financial statements of companies in
responded by investors in influencing the value of
Indonesia after the adoption of IFRS. Therefore, in
the company.
subsequent studies, it can be reexamined by using
Pincus & Rajgopal (2002) and Oktavia & financial companies or other developing country
Martani (2013) state that derivative transactions are data to compare the results of research testing with
strongly related to earnings management actions so this research. Future studies can also use data with
that ownership of derivatives is relatively harmful a longer time horizon both before and after the
to the company from the investor side. However, adoption of IFRS.
based on test results in this study, derivative
Based on the results of this study, OJK
transactions do not result in a decrease in the value
can be used to monitor the use of derivative
of the company. This information is not enough to
instruments by companies listed on the Indonesia
convince investors in making investment decisions
Stock Exchange. Also, OJK needs to pay attention
on the capital market. There is more useful
to investor protection in Indonesia. Regulatory
information for investors than information about
disclosure arrangements by companies need to be
derivatives conducted by the company.
regulated in more detail by the Indonesian Institute
The results of this test do not distinguish that of Accountants through financial accounting
the use of derivative instruments in developing standards so that users of financial statements more
countries is becoming less effective. Another easily understand them.

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