36 Pages Posted: 8 Nov 1999
Date Written: July 1999
We study the economic consequences of alternative hedge accounting rules in terms of managerial hedging decisions and wealth effects for shareholders. The rules we consider include the "fair-value" and "cash-flow" hedge accounting methods prescribed by the recent SFAS No. 133. We illustrate that the accounting method used influences the manager's hedge decision. We show that under no-hedge accounting, the hedge choice is different from the optimal economic hedge the firm would make under symmetric and public, information. However, under a certain definition of fair-value hedge accounting, the hedging decision preserves the optimal economic hedge. We then demonstrate that long-term and future shareholders prefer a certain definition of fair-value hedge accounting to no-hedge accounting, while short-term shareholders prefer either approach depending on risk preferences and the level of uncertainty. We speculate about circumstances in which a manager would choose not to adopt fair-value hedge accounting when he has the option not to do so.
JEL Classification: G31, G32
Suggested Citation: Suggested Citation
Melumad, Nahum D. and Weyns, Guy and Ziv, Amir, Comparing Alternative Hedge Accounting Standards: Shareholders? Perspective (July 1999). Available at SSRN: https://ssrn.com/abstract=189853 or http://dx.doi.org/10.2139/ssrn.189853
By Haresh Sapra