Operational metrics in derivatives adoption: Evidence from China's chemical industry

Manufacturers face severe raw-material price volatility. Inventory represents both a core operational asset and their primary source of risk exposure. The operations-finance interface literature links these operational realities to financial hedging. However, large-sample evidence on what drives the decision remains scarce. Drawing on 289 listed Chinese chemical firms from 2016 to 2022, we address this gap. We examine how operational exposure, measured by inventory level and inventory turnover, compares against traditional financial determinants. Specifically, we evaluate their relative impact on firms’ derivations adoption. Our empirical strategy integrates probit estimation, moderation analysis, and k-means clustering. We find that operational metrics are the primary drivers of derivatives adoption. Inventory level and turnover outweigh traditional financial indicators, including liquidity, leverage, and growth. Among financial factors, only pre-tax profit remains consistently significant. Furthermore, the firm’s financial capacity moderates these effects. Operational exposure dominates the hedging decisions of cash-constrained firms. Conversely, well-capitalized firms hedge more selectively. These findings remain robust to rigorous endogeneity tests and controls for geographic heterogeneity and pandemic shocks. Building on these empirical patterns, we develop a managerial decision framework. This framework maps a firm’s operational exposure and financial capacity to specific hedging stances and derivative instruments. Finally, this study contributes large-sample empirical evidence on the relative importance of operational versus financial drivers of derivatives adoption, bridging the operations-finance interface with industrial practice.