Based on the sample of Chinese A-share listed companies during 2010-2020, this paper analyses the effect of derivatives use on corporate risk, as well as the moderating effect of internal control. The study finds that firm derivatives reduce corporate risk, and the internal control quality intensifies the risk hedging effect. The instrumental variable method, the treatment effect model, lagging the explanatory variables by one period, adding control variables and replacing the explained variables show that the above conclusions are robust. The risk hedging effect is only significant in non-state-owned firms, small firms and firms with high information transparency, indicating that corporate governance plays a crucial role in the risk hedging of derivatives. The findings provide some theoretical references for the regulation of derivatives market, disclosure of derivatives information and firm risk management.
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