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Comparing Alternative Hedge Accounting Standards: Shareholders? Perspective

36 Pages Posted: 8 Nov 1999  

Nahum D. Melumad

Columbia Business School - Accounting, Business Law & Taxation

Guy Weyns

Singapore Management University - School of Accountancy

Amir Ziv

Columbia Business School

Date Written: July 1999

Abstract

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

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

Nahum D. Melumad

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
611 Uris
New York, NY 10027
United States
212-854-2475 (Phone)

Guy Weyns

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Amir Ziv (Contact Author)

Columbia Business School ( email )

3022 Broadway, 704 Uris
New York, NY 10027 10027
United States
212 854-3485 (Phone)
212 253-4095 (Fax)

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