2018
DOI: 10.1287/mnsc.2016.2717
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The Informational Role of Corporate Hedging

Abstract: We study the informational role of corporate hedging. We compare two alternative hypotheses. Under the "opacity" hypothesis, corporate hedging makes earnings less informative, thus rendering the firm more opaque to the market, and increasing the profitability of more informed traders. Under the "transparency" hypothesis, corporate hedging, by reducing uncertainty about firm value, erodes the information advantage of the more informed traders, thus limiting their profitability. We test these hypotheses using a … Show more

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Cited by 46 publications
(55 citation statements)
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References 67 publications
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“…Extant empirical studies following the agency theoretical concept of Jin and Myers (2006) argue that opaque financial reporting and information environment increase the possibilities of a stock price crash (e.g., Hutton, Marcus, & Tehranian, 2009;DeFond, Hung, Li, & Li, 2015;Ertugrul, Lei, Qiu, & Wan, 2017). Meanwhile, the empirical results on the influence of corporate hedging on information environment are mixed (e.g., DaDalt, Gay, & Nam, 2002;Manconi, Massa, & Zhang, 2018;Chang, Donohoe, & Sougiannis, 2016). We provide evidence on the effect of hedging with derivatives on information environment by exploring whether and how hedging activities have an impact on crash risk.…”
Section: Introduction 910mentioning
confidence: 91%
See 1 more Smart Citation
“…Extant empirical studies following the agency theoretical concept of Jin and Myers (2006) argue that opaque financial reporting and information environment increase the possibilities of a stock price crash (e.g., Hutton, Marcus, & Tehranian, 2009;DeFond, Hung, Li, & Li, 2015;Ertugrul, Lei, Qiu, & Wan, 2017). Meanwhile, the empirical results on the influence of corporate hedging on information environment are mixed (e.g., DaDalt, Gay, & Nam, 2002;Manconi, Massa, & Zhang, 2018;Chang, Donohoe, & Sougiannis, 2016). We provide evidence on the effect of hedging with derivatives on information environment by exploring whether and how hedging activities have an impact on crash risk.…”
Section: Introduction 910mentioning
confidence: 91%
“…These results indicate that the economic and financial reporting complexity of derivatives deteriorates earnings informativeness, making the information environment more opaque. That is, hedging increases financial reporting opportunism of managers by encouraging managers to use irrational assumptions in accounting processes or conceal significant information needed to understand them (Manconi et al, 2018), ultimately leading to greater crash risk. Moreover, endogeneity is a potential issue for any analysis of corporate hedging.…”
Section: Introduction 910mentioning
confidence: 99%
“…friction (Manconi, Massa, & Zhang, 2018), this might also be the subject of future studies. Further ideas might be the consideration of endogenous relations, such as the relation between dividend policy and capital structure decisions (Crutchley, Jensen, Jahera Jr., & Raymond, 1999) and the analysis of non-linear effects, which might lead to more accurate results for particular effects (for example, Crutchley et al, 1999).…”
Section: Data Availability Statementmentioning
confidence: 90%
“… Note : The hedging changes in distressed firms around 2005 are first examined and then an ex‐post abnormal hedging measure to test its impact on IPO underpricing is constructed. In Panel A, we follow Manconi et al (2018) to examine the determinants of corporate hedging in a logistic model in the pre‐reform period. We use three sets of hedging dummy variables Hedging i , Interest Hedging i , and FX Hedging i .…”
Section: Addressing Endogeneity Concernsmentioning
confidence: 99%