Does Fair Value Reporting Affect Risk Management? International Survey Evidence
Karl V. Lins
University of Utah - Department of Finance
London Business School; Centre for Economic Policy Research (CEPR)
London School of Economics & Political Science (LSE)
April 27, 2010
Financial Management, Forthcoming
We survey CFOs of public and private firms from 36 countries to examine whether and why firms from around the world altered their risk management policies when fair value reporting standards for derivatives were introduced, a substantial fraction of firms (42%) state that their risk management policies have been materially affected by fair value reporting. Firms are more likely to be affected by fair value reporting if they seek to use risk management to reduce the volatility of earnings relative to cash flows and if they operate in countries with low disclosure standards. Further, firms significantly reduced the use of non-linear options contracts as a result of the regulations, but did not significantly change their use of linear derivative contracts. Finally, while most firms in our sample do not use derivatives to take active positions (speculate), those who do are more likely to be affected by fair value reporting. Taken together, our evidence shows that requirements to report derivatives at fair values have had a material impact on derivative use; while speculative activities have been reduced, sound hedging strategies have been compromised as well.
Number of Pages in PDF File: 51
Keywords: risk management, speculation, derivatives, fair values, financial reporting standards
JEL Classification: G03, M41, M44, D82working papers series
Date posted: February 27, 2009 ; Last revised: June 9, 2011
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