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Introduction
The rapid development and innovation of financial derivatives with low transaction costs may
meet the multiple demand of the hedging of enterprises. (Gewalda, 2010). However, the
characteristics of high leverage and implied high risks will result to many problems arising from
excessive operation. Regarding the mode of industrial development, with Taiwan’s IC industry
as an example, the IC industry has undergone three major revolutions, and developed two
business models of vertical integration (Integrated Device Manufacturing, IDM) and virtual
integration. The two business models coexist and compete with each other. (Chu et al., 2005).
Previous studies have discussed the use of financial derivatives to hedge in the face of foreign
exchange rate risk and the discussions on the interest rate risk in the of financial crisis are rare.
During the global financial crisis, the different levels of sensitivity in the balance sheets of
enterprises lead to different due dates of debts, different accounting basis or the cash flow
uncertainty arising from the financial contracts of floating interest rates. Hence, this paper aims
to find out how Taiwan’s IC industry can effectively avoid interest rate risk in case of two
business models. To hedge the interest rate risk, enterprises may use multiple types of hedging
tools and the result of affecting factors, the effectiveness of using financial derivatives before
and after financial crisis are worthy for further discussions. Hence, these are listed as key points
for in-depth discussions in this study. The discussions on the scope of hedging decision making
factors regarding of the use of financial derivatives are extensive, and can be divided into the
four points, as listed below Graham and Roger (2002) the costs of financial crisis will result in
fluctuations in corporate value, and urged enterprises to take hedging activities to reduce the
probability of the occurrence of financial crisis. (Campello et al. 201) Smith and Stulz(1985)
proposed that the separation of ownership and operating power will create the agency problem
between creditors and shareholders who provide capital, and the managers who use the capital,
resulting in agency costs. (Fauver et al., 2010). According to the information economies of scale
assumption, Block and Gallagher (1986) argued that large enterprises are more capable of
inviting professional managers to use financial derivatives for hedging with lower transaction
costs on average.(Carter et al., 2006). Tufano(1996)have different opinions concerning the
impact of company size on the hedging motivation of the company. However, the diversification
of assets of the large enterprises is easier and the external financing is more easily. As a result,
small enterprises will have more hedging activities. Gale and Hellwig (1985) to raise corporate
value, the enterprises will use financial derivatives for hedging to mitigate the fluctuations in
cash flow of the company to distribute the redundant capital to places in short of cash flow, in
order to increase the investment opportunities. (Graham and Rogers, 2002 ;Bartram et al.,
2009)
Data and Empirical Result
In this study, the research period is from January 1, 2007 to June 30, 2011. The 5 years are
divided into 9 periods of each half of a year. My data is from Public Information Observation
Website, Taiwan Stock Exchange, Annual reports and prospectus of listed and OTC enterprises
in Taiwan, Taiwan Economic Journal Database as the source of sample selection and
measurement variables. There is Virtual Integration for 7 samples, Vertical Integration is for 59
samples, total sample are 66. This paper first conducts the Pearson correlation analysis is
performed to analyze the correlation of various variables to eliminate the collinearity of the
regression model. Finally, logistic regression analysis is employed to test the hedging by using
financial derivatives, the hedging purpose and the selection of hedging tools. Logistic regression
model’s explanatory variable is a nominal scale variable of discontinuity. In addition to testing
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