Does Fair Value Reporting Affect Risk Management? International Survey Evidence

Financial Management, Forthcoming

51 Pages Posted: 27 Feb 2009 Last revised: 9 Jun 2011

See all articles by Karl V. Lins

Karl V. Lins

University of Utah - Department of Finance

Henri Servaes

London Business School; Centre for Economic Policy Research (CEPR)

Ane Tamayo

London School of Economics & Political Science (LSE)

Multiple version iconThere are 2 versions of this paper

Date Written: April 27, 2010

Abstract

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.

Keywords: risk management, speculation, derivatives, fair values, financial reporting standards

JEL Classification: G03, M41, M44, D82

Suggested Citation

Lins, Karl V. and Servaes, Henri and Tamayo, Ane Miren, Does Fair Value Reporting Affect Risk Management? International Survey Evidence (April 27, 2010). Financial Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1350251 or http://dx.doi.org/10.2139/ssrn.1350251

Karl V. Lins

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-3171 (Phone)
801-581-7214 (Fax)

Henri Servaes (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7000 8268 (Phone)
+44 20 7000 8201 (Fax)

HOME PAGE: http://faculty.london.edu/hservaes/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ane Miren Tamayo

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)20 78494689 (Phone)

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