Hedge Accounting Determinants and Consequences: New Evidence from Brazilian Companies.

Abstract

We investigated the determinants and the consequences of hedge accounting as an accounting choice in the Brazilian capital market. We analyzed a sample of 187 nonfinancial firms which used derivatives or non-derivatives to risk management from 2010 to 2017. We contributed with two new proxies for the assessment of hedge accounting practice. The first hypothesis is to analyze whether companies that use hedge accounting have a higher maximization of firm value. The second hypothesis is whether companies' earnings were smoothing less than practices this policy and the last one is if hedge accounting is being used to avoid violated debt covenants. These findings suggest that companies in the cluster with the highest level of hedge accounting designation in the periods had a positive and significant relationship with the higher firm value, corroborating the prior literature. We can identify that companies that designated a lower amount of derivatives to hedge accounting indicated a higher trend of income smoothing. These findings corroborate the main purpose of hedge accounting that is a reliable representation of risk management in the financial statements. We did not find evidence that proximity to violate covenants as a determinant for adoption or the higher level of adoption derivatives for hedge accounting.