Strategic Entry Decisions, Accounting Signals, and Risk Management

Abstract

This study provides evidence that hedge accounting information under SFAS 133 is related to rivals’ market entry decisions. Documenting accounting information’s relevance to competition decisions requires context-specific settings. Using data for the airline industry in the United States, I predict and find that entrants are less likely to enter routes in which incumbents report higher accumulated other comprehensive income (AOCI) from fuel hedging, an indication of lower future operating costs. As predicted, this relation is stronger after the adoption of SFAS 161 in 2008, a systematic shock that significantly increases risk management disclosure requirements. The findings illustrate the product market relevance of hedge accounting signals and disclosure in the U.S. airline industry, and extend the understanding of SFAS 133 and SFAS 161 beyond the capital markets.

Keywords: airline industry, hedge accounting, strategic entry, risk management disclosure, SFAS 133, SFAS 161