The Impact of Hedge Accounting Rules on Enterprise Risk Management Adoption Practices by Multinationals

37 Pages Posted: 16 Mar 2011

See all articles by Paul J. M. Klumpes

Paul J. M. Klumpes

Nottingham Trent University

Pengguo Wang

Xfi, University of Exeter

Liyan Tang

affiliation not provided to SSRN

Abhay Abhyankar

University of Exeter Business School, University of Exeter

Date Written: March 7, 2011

Abstract

We predict that adoption of Enterprise Risk Management (ERM) by multinational non-financial firms is inter-related with firm hedge accounting policies and GAAP quality. We hypothesize that sources of both market risk and idiosyncratic risk mitigate the ability of ERM-adopting firms to produce greater risk reduction. Therefore, we predict that sources of firm specific risk, such as pension risk, and hedge accounting policies, as well as GAAP quality, interact with ERM to affect incentives facing multinational firms to reduce their risk. Consistent with this hypothesis, we find that firms adopting ERM experience a reduction in stock return volatility but only for the period following implementation. Our results also find that income smoothing; GAAP choice and geographical complexity mitigate the effect of ERM adoption on risk and return volatility for ERM-adopting firms.

Keywords: Enterprise Risk Management, Derivative exposure, multinationals

JEL Classification: M40

Suggested Citation

Klumpes, Paul J.M. and Wang, Pengguo and Tang, Liyan and Abhyankar, Abhay, The Impact of Hedge Accounting Rules on Enterprise Risk Management Adoption Practices by Multinationals (March 7, 2011). Available at SSRN: https://ssrn.com/abstract=1784250 or http://dx.doi.org/10.2139/ssrn.1784250

Paul J.M. Klumpes (Contact Author)

Nottingham Trent University ( email )

Burton Street
Nottingham NG1 4BU, NG1 4LN
United Kingdom

Pengguo Wang

Xfi, University of Exeter ( email )

Streatham Court
Exeter, EX4 4PU
United Kingdom

Liyan Tang

affiliation not provided to SSRN

Abhay Abhyankar

University of Exeter Business School, University of Exeter ( email )

Streatham Court
Exeter, EX4 4PU
United Kingdom

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