Does Fair Value Reporting Affect Risk Management? International Survey Evidence
Financial Management, Forthcoming
Posted: 8 Jun 2011
Date Written: May 30, 2011
We survey CFOs from 36 countries to examine whether and why firms 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 if they seek to use risk management to reduce the volatility of earnings relative to cash flows and if they operate in countries with high disclosure standards. We also document a substantial decrease in foreign exchange hedging and in the use of non-linear hedging instruments. Finally, firms that take active positions 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: F31, G18, G31, M41
Suggested Citation: Suggested Citation