Do Firms Use Derivatives for Hedging or Non-Hedging Purposes? Evidence Based on SFAS 161 Disclosures

Manchiraju, Hariom; Pierce, Spencer; Sridharan, Suhas A.

doi:10.2139/ssrn.2417194

Cited by 12 publications

(18 citation statements)

References 4 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Other research on the outcomes of derivative use and hedging activities finds that derivative use affects risk exposures (Schrand, 1997;Guay, 1999;Manchiraju et al, 2014) and increases firms' values, investments, and leverage (Allayannis and Weston, 2001;Pérez-González and Yun, 2013). These findings indicate that derivative use and hedging activities affect firms materially, underscoring the need for financial statement users to understand them.…”

Section: Determinants and Effects Of Derivative Use And Hedging Activmentioning

confidence: 92%

“…Examples include private information, career concerns, risk aversion, and/or price uncertainty (e.g., Holthausen, 1979;Stulz, 1984;Duffie, 1991, 1995). Similarly, empirical studies find that both managerial characteristics (e.g., experience, stock versus option holdings) and firm characteristics (e.g., block holdings, cash balances, growth opportunities, financial constraints, risk exposure, financial contracting costs) are associated with derivative use and hedging activities (Tufano, 1996;Géczy et al, 1997;Manchiraju et al, 2014). These findings show that many factors affect the decision to hedge and/or use derivatives, which is consistent with the FASB's point of view that improved derivative and hedging disclosures should provide financial statement users with more information about "how and why an entity uses derivatives" (FASB, 2008, paragraph 1).…”

Section: Determinants and Effects Of Derivative Use And Hedging Activmentioning

confidence: 99%

“…Second, my study expands the SFAS 161 literature that so far has focused primarily 9 Because SFAS 133 introduced new standards for both recognition and disclosure, it is difficult to conclude whether one or both are driving Zhang's (2009) findings. 10 For example, McAnally (1996) averages 166 banks per year; Ahmed et al (2011) use 141 banks;Venkatachalam (1996) on competitors' use of disclosure (Zou, 2012), the effects of hedge accounting, and whether firms use derivatives to hedge or speculate (Pierce, 2015;Cowins, 2014;Manchiraju et al, 2014). By investigating the effects of particular characteristics of derivative and hedging disclosures on investor and analyst uncertainty, I shed light on how financial statement users are affected by the FASB's efforts to improve these disclosures.…”

mentioning

confidence: 99%

See 2 more Smart Citations

Improving Financial Statement Footnotes: Evidence from Derivative and Hedging Disclosures

Steffen

2016

SSRN Journal

View full text Add to dashboard Cite

I investigate whether changes in derivative and hedging footnote disclosures required by SFAS 161 affect investor and analyst uncertainty. My study is motivated by accounting standard setters' and researchers' interest in disclosure effectiveness, and by prior research linking investors' interpretations of public information to measures of uncertainty. For a broad sample of firms, I use textual analysis to measure changes in the amount and salience of derivative and hedging information caused by SFAS 161. Using a difference-in-differences design to study the effects of these changes, Ifind that investor uncertainty is reduced for firms adopting SFAS 161. In addition, I find that for some uncertainty proxies this reduction is greater for firms whose disclosures were more affected by SFAS 161, consistent with the new disclosures improving investor understanding. I also find evidence of a decreased association between bid-ask spread and movements in risk factors, indicating that SFAS 161 reduced uncertainty stemming from these movements.

show abstract

Section: Determinants and Effects Of Derivative Use And Hedging Activmentioning

confidence: 92%

Section: Determinants and Effects Of Derivative Use And Hedging Activmentioning

confidence: 99%

mentioning

confidence: 99%

See 1 more Smart Citation

Improving Financial Statement Footnotes: Evidence from Derivative and Hedging Disclosures

Steffen

2016

SSRN Journal

View full text Add to dashboard Cite

show abstract

“…Larger values of VIX indicate higher market volatility. Like prior studies (e.g., Manchiraju, Hamlen, Kross, & Suk, and Manchiraju, Pierce, & Sridharan, ), we measured hedge ineffectiveness (HG_INE) as the ratio of derivative gains or losses due to hedging ineffectiveness to total assets.…”

Section: Methodsmentioning

confidence: 99%

SFAS 133 and income smoothing via discretionary accruals: The role of hedge effectiveness and market volatility

Tessema

Deumes

2017

Financ Manag Account

View full text Add to dashboard Cite

This study investigates whether the Statement of Financial Accounting Standard No. 133 (SFAS 133) influences firms' income smoothing via discretionary accruals decisions. Moreover, we investigate whether the level of hedge effectiveness and market volatility affects the impact of SFAS 133 on firms' income smoothing via discretionary accruals decisions. Consistent with our predictions, we find a significant increase in income smoothing via discretionary accruals activity after the adoption of SFAS 133. We also find that income smoothing via discretionary accruals after the adoption of SFAS 133 increases with the level of hedge ineffectiveness. By contrast, we find that perfect hedgers do not engage in more income smoothing via discretionary accruals after the adoption of SFAS 133. Finally, we find that the higher the market volatility is the larger the income smoothing is via discretionary accruals after the adoption of SFAS 133. This implies that higher market volatility makes it more difficult for firms to meet hedge accounting requirements, thereby increasing unmanaged earnings volatility and income smoothing. Prior studies suggest that regulators are expressing concern about the effect of earnings management on the quality of reported earnings and the functioning of capital markets (e.g., Barton, 2001). In this ---

show abstract

“…39 This distribution of derivatives holdings between trading and non-trading purposes is not limited to banks. Manchiraju et al (2014) examined derivatives holding by a large sample of oil and gas companies. They find that the majority of derivatives used by these companies are also for 'trading' and conclude that ''the majority of firms (oil and gas companies) in our sample choose to use non-hedge derivatives, despite their use actually increasing risk, is puzzling.''…”

Section: The Relationship Between Earnings Volatility and Hedging Dermentioning

confidence: 99%

Growth in financial derivatives: The public policy and accounting incentives

Abdel-Khalik

Chen

2015

Journal of Accounting and Public Policy

View full text Add to dashboard Cite

Do Firms Use Derivatives for Hedging or Non-Hedging Purposes? Evidence Based on SFAS 161 Disclosures

Cited by 12 publications

References 4 publications

Improving Financial Statement Footnotes: Evidence from Derivative and Hedging Disclosures

Improving Financial Statement Footnotes: Evidence from Derivative and Hedging Disclosures

SFAS 133 and income smoothing via discretionary accruals: The role of hedge effectiveness and market volatility

Growth in financial derivatives: The public policy and accounting incentives

Contact Info

Product

Resources

About