1998 Wharton survey of financial risk management by US non-financial firms

Financial Management (Financial Management Association), Winter, 1998 by Gordon M. Bodnar, Gregory S. Hayt, Richard C. Marston

This is the third in a series of surveys on financial risk management practice and derivatives use by nonfinancial corporations in the United States undertaken by the Weiss Center for International Financial Research of the Wharton School and CIBC World Markets. The results of the two earlier surveys, carried out in 1994 and 1995, are published in Financial Management and have been widely cited in the business and academic press.(1) The 1998 survey, again sponsored by CIBC World Markets, extends the previous two surveys by asking new questions about certain aspects of derivatives use and risk management practice. This report provides a summary of the responses to the questions on the 1998 survey both in total and, when responses differ, conditional on size and industrial sector. In addition, where appropriate, current responses are compared with responses to similar questions on previous surveys. However, caution is required in interpreting some of those comparisons as some differences may result simply from changes in the set of responding firms. A copy of the questionnaire with the response tallies is displayed in the Appendix.

As with the previous surveys, one of the primary objectives of this survey is the development of a database on risk management practices suitable for academic research. The survey results can be linked with industry and firm-specific characteristics of the respondents to allow economic analysis of the responses. However, as in the past, the firm-specific responses are confidential and known only to the researchers at Wharton.

I. Use of Derivatives

This section relays the results of the derivatives-use portion of the 1998 survey.

A. Sample Firms and Overall Derivatives Usage

The six-page questionnaire was mailed in October 1997 to the same basic sample of firms used in the 1994 and 1995 surveys. The sample consists of the original randomly selected 2,000 publicly traded firms used in 1994 plus the remaining 154 non-financial Fortune 500 firms added in 1995. Due to mergers, buyouts, and bankruptcies since 1994, this sample currently consists of 1,928 firms. A second mailing of the questionnaire was done in March 1998. Of the firms surveyed, 399 returned a completed survey, yielding a response rate of 20.7%. Of these firms, 197 are from the manufacturing sector; 82 are from the primary-products sector, which includes agriculture, mining, energy, as well as utilities; and 120 are from the service sector. In terms of size, 160 firms are from the large category, consisting of firms with fiscal year 1996 total sales greater than $1.2 billion, 116 are from the medium-sized category, with total sales between $1.2b and $150m, and 123 are from the small category, with total sales less than $150m.(2)

The first question in the survey asks firms whether they use derivatives. Of the firms, 200, or 50%, report using derivatives. Table 1 displays the breakdown of the first question. In the "Full Sample" row of Table 1, we compare this usage rate with that of the previous two surveys. The results suggest that the percentage of responding firms using derivatives has increased each year. However, this increase over time may be a combination of the change in the sample in 1995 and/or variation in response composition. A better way to compare derivatives use over time is to compare the response of the same set of firms. In the second row of Table 1, we report the usage percentages for the 58 firms that responded to all three surveys. Interestingly, in all three years the percentage of derivatives users from this group is 41%, although several firms switch between use and non-use across years. Because of the limited number of firms that responded to all three surveys, we also report the usage percentages for the 171 firms that responded to both the 1994 and the 1998 surveys. These percentages, reported in the bottom row of Table 1, are also the same in both years at 44%. Overall, these results suggest that the percentage of firms using derivatives has remained constant over the past three years.

B. Change in Usage Intensity

While the evidence suggests that the percentage of firms using derivatives has not changed noticeably, we were interested in determining whether there was any change in the intensity of usage among the firms that use derivatives. To consider this, Question 2 asks the derivative using firms to indicate how their derivative usage in the current year compared to usage in the previous year (based upon the notional value of total contracts). Figure 1 displays the response to this question. Of derivative users, 42% indicated that their usage had increased over the previous year, compared to just 13% who indicated a decrease. The remaining firms indicated that their usage had remained constant. Overall, these responses suggest that a significant proportion of derivatives users is finding derivatives helpful enough that they are choosing to increase their usage.

Table 1. Comparison of Derivative Usage Across Surveys

                                      Percentage of
                                      Respondents
                         Year of         Using
                         Survey       Derivatives

This Survey               1998            50%

Previous Years'           1995            41%
Surveys                   1994            35%

Firms Responding to       1998            41%
All Three Surveys         1995            41%
(58 Firms)                1994            41%

Finns Responding in       1998            44%
Both 1994 & 1998          1994            44%
(171 Firms)