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Despite the widespread use of derivatives by firms, and the impressive growth in the derivatives market in the last two decades, empirical evidence on the effect of derivative usage on firm value is limited and often mixed. There are several reasons for this. First, there is a lack of data on the extent and direction of a firm's exposure to risk. It is often non-trivial to even identify the frictions that hedging may help overcome. Second, data on the kinds of derivatives used by a firm, and indeed on whether firms are hedging or speculating, may be unavailable. Finally, hidden or unobservable firm characteristics introduce additional complications that a affect the interpretation of empirical results.
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