Fair Value Accounting and Managers' Hedging Decisions

Journal of Accounting Research, Forthcoming

49 Pages Posted: 26 Aug 2012

See all articles by Wei Chen

Wei Chen

UNSW Australia Business School, School of Accounting

Hun-Tong Tan

Nanyang Business School, Nanyang Technological University

Elaine Wang

University of Massachusetts Amherst

Date Written: August 26, 2012

Abstract

We conduct two experiments with experienced accountants to investigate how fair value accounting affects managers’ real economic decisions. In Experiment 1, we find that participants are more likely to make sub-optimal decisions (e.g., forgo economically sound hedging opportunities) when both the economic and fair value accounting impact information is presented than when only the economic impact information is presented, or when both the economic and historical cost accounting impact information is presented. This adverse effect of fair value accounting is more likely when the price volatility of the hedged asset is higher, which is a situation where, paradoxically, hedging is more beneficial. We find that the effect is mediated by participants’ relative considerations of economic factors versus accounting factors (e.g., earnings volatility). Experiment 2 shows that enhancing salience of economic information or separately presenting net income not from fair value remeasurements reduces the adverse effect of fair value accounting. Our findings are informative to standard setters in their debate on the efficacy of fair value accounting.

Keywords: fair value accounting, historical cost accounting, earnings volatility, hedging decisions

JEL Classification: C91, D83, G18, M41, M43, M44

Suggested Citation

Chen, Wei and Tan, Hun-Tong and Wang, Elaine (Ying), Fair Value Accounting and Managers' Hedging Decisions (August 26, 2012). Journal of Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2136481

Wei Chen

UNSW Australia Business School, School of Accounting ( email )

Sydney, NSW 2052
Australia

Hun-Tong Tan (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore
+65 6790 4819 (Phone)
+65 6793 7956 (Fax)

Elaine (Ying) Wang

University of Massachusetts Amherst ( email )

Amherst, MA 01003-4910
United States
413-545-7613 (Phone)

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