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Derivatives Use, Corporate Governance, and Legislative Change: An Empirical Analysis of New Zealand Listed Companies

This paper examines if board composition has any systematic bearing on derivatives usage by New Zealand listed companies. We also test if derivative usage changed following the introduction of the new 1993 Companies Act. The Act raised expectations of directors' fiduciary responsibilities and the perceived risk of liability on outside directors for poor investment decisions. Using a dataset of listed New Zealand companies in 1994 and 1997, we find companies with higher growth opportunities and a greater proportion of outside directors were less likely to use financial derivatives following the introduction of the new Act. Our results supplement the US-based literature on derivatives usage by illustrating that internal governance mechanisms can play a role in corporate derivatives policy, and that the legislative and regulatory environment may affect this role. Copyright Blackwell Publishers Ltd, 2005.