The role of derivatives’ use on firms’ capital cost and financial stability: evidence from South African listed non-financial firms

Purpose This study investigates the practical impact of derivatives’ usage on the underlying firm’s financing policy and stability. Design/methodology/approach Data from South African-listed non-financial firms are utilised. The study employs a dynamic panel model estimated with System Generalised Methods of Moments (GMM). Findings It was found that although the utilisation of derivatives for hedging typically decreases the cost of capital and increases firm stability, this association changes when a more detailed measure that captures the extent of hedging is considered. Practical implications These findings imply that the risk embedded in derivatives’ speculation dominates their risk management function suggesting that firms should carefully consider the implications of extensive derivatives use in their financing decisions. The results underscore the importance of robust risk management practices in derivative usage, especially in light of the observed negative impact on financing costs and financial stability. Originality/value This research contributes to the literature by empirically examining how derivatives’ two-edged roles, speculation and risk management, influence firms’ financing decisions and stability, thereby clarifying which role is considered dominant by investors. Prior studies have focused on derivatives’ impact on firm investment and performance but have neglected their role in the cost of financing.