The effect of financial derivative usage on cost of equity capital of commercial banks from GCC countries: An empirical study from 2006 to 2018

Abstract

After the globalization and markets integration, many changes have influenced both financial and banking sectors. Hence, in order to adapt with these changes the derivative instruments were created and they knew a rapid growth. Using the annual data of 25 commercial banks from GCC countries covering the whole period from 2006 to 2018 additionally to daily market data during the period 2010 to 2018, the objective of this thesis is to investigate mainly whether the use of financial derivatives makes banks reducing their cost of equity capital. In addition, this thesis also examines the effect of financial derivatives usage on both performance and risk of banks. Main results reveal that the use of derivative instruments lowers both performance and risk of commercial banks. Moreover, findings also show that the cost of equity capital in commercial banks is reduced due to the use of financial derivatives by these banks.