Abstract

http://ssrn.com/abstract=926405
 
 

References (35)



 
 

Citations (15)



 


 



Effect of Derivative Accounting Rules on Corporate Risk-Management Behavior


Haiwen Zhang


Ohio State University (OSU) - Department of Accounting & Management Information Systems

January 2008


Abstract:     
This paper examines the effect of the accounting standard for derivative instruments (SFAS No. 133) on corporate risk-management behavior. SFAS 133 requires companies to recognize the fair value of derivative instruments in their financial statements; however, it provides preferential accounting treatment for derivative instruments that effectively hedge the underlying business risk. Thus, I hypothesize that the effect of the standard on firms' risk-management activities varies depending on the hedge effectiveness of the derivative instruments. I designate a new derivative user as an effective hedger (EH firm) if its risk exposures decreased relative to the expected level after the initiation of the derivatives program and as an ineffective hedger/speculator (IS firm) otherwise. The empirical results show that risk exposures relate to interest-rate, foreign exchange-rate, and commodity price decrease significantly for IS firms but not for EH firms after the adoption of SFAS 133. Consistent with the decrease in risk exposures, I find that the volatility of cash flows for IS firms also decreases significantly while the volatility of earnings remains unchanged. The combined evidence suggests that SFAS 133 has encouraged firms to engage in more prudent risk-management activities.

Number of Pages in PDF File: 58

Keywords: SFAS 133, Derivative instruments, risk-management behavior

JEL Classification: G10, G32, M41, M44

working papers series





Download This Paper

Date posted: August 25, 2006 ; Last revised: January 6, 2009

Suggested Citation

Zhang, Haiwen, Effect of Derivative Accounting Rules on Corporate Risk-Management Behavior (January 2008). Available at SSRN: http://ssrn.com/abstract=926405 or http://dx.doi.org/10.2139/ssrn.926405

Contact Information

Haiwen Zhang (Contact Author)
Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )
2100 Neil Avenue
Columbus, OH 43210
United States
Feedback to SSRN


Paper statistics
Abstract Views: 2,866
Downloads: 1,025
Download Rank: 10,951
References:  35
Citations:  15

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo2 in 0.500 seconds