USE OF DERIVATIVES AND ITS IMPACT ON FIRM PERFORMANCE AND FIRM VALUE WITH MODERATING ROLE OF MANAGERIAL RISK APPETITE

Abstract

This study explores the influence of derivative application on firm performance and firm value in non-financial listed firms on the Pakistan Stock Exchange from 2013-2023. Given an illiquid and underdeveloped derivatives market in Pakistan, we investigate whether the use of financial derivatives has clear positive benefits on commonly reported firm performances and value: Return on Assets (ROA), Return on Equity (ROE) and Tobin's Q. The study also uses panel EGLS regression with random effects to evaluate the moderating role of managerial risk appetite on these outcomes. The study finds that derivative application does not lead to an improvement in performance or value and in many cases reported negatively. Specifically, where high leverage conditions exist in firm use of derivatives, it is generally reported negative effects on financial performance. The results suggest that in emerging markets like Pakistan, the positive implications for using derivative instruments is heavily dependent on the firm's inherent risk governance and market conditions. Finally, the study provides key policies and managerial implications to improve the strategic effectiveness of financial derivatives.