An Empirical Analysis of the Correlation Between Derivatives Usage and Firm Specific Factors in Zimbabwe

Abstract

The research examined 45 firms’ derivative usage in relation to their financial gearing, size, liquidity, profitability, and solvency ratio. A logit regression model was run from the year 2019 to the year 2021. The logit model revealed at 99% level of confidence that, a firm’s derivative usage is significantly and positively related to its liquidity ratio as measured by cash and cash equivalents to total assets ratio. The study also revealed that usage of share options by firms listed on the Zimbabwe Stock Exchange had no significant relationship with financial gearing, firm size, profitability, and solvency ratio at 1% level of significance. Hence the study encourages firms to significantly improve on their liquidity positions prior to the issuance of employees’ stock options, in-order to provide robust safety nets for vesting.

Keywords: Derivative usage, liquidity ratio, logit regression model, share options

DOI: 10.7176/RJFA/13-24-08

Publication date: December 31^st 2022