Not Available for Download

Do Analysts Understand the Economic and Reporting Complexities of Derivatives?

Posted: 23 Jul 2015  

Hye Sun Chang

Singapore Management University - School of Accountancy

Michael P. Donohoe

University of Illinois at Urbana-Champaign - Department of Accountancy

Theodore Sougiannis

University of Illinois at Urbana-Champaign - Department of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: July 21, 2015

Abstract

We investigate whether and how the complexity of derivatives influences analysts’ earnings forecast properties. Using a difference-in-differences design, we find that, relative to a matched control sample of non-users, analysts’ earnings forecasts for new derivatives users are less accurate and more dispersed after derivatives initiation. These results do not appear to be driven by the economic complexity of derivatives, but rather the financial reporting of such economic complexity. Overall, despite their financial expertise, analysts routinely misjudge the earnings implications of firms’ derivatives activity. However, we find evidence that a series of derivatives accounting standards has helped analysts improve their forecasts over time.

Keywords: derivatives, economic complexity, reporting complexity, hedging, sell-side analysts, earnings forecasts

JEL Classification: G29, G32, M41

Suggested Citation

Chang, Hye Sun and Donohoe, Michael P. and Sougiannis, Theodore, Do Analysts Understand the Economic and Reporting Complexities of Derivatives? (July 21, 2015). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2634201

Hye Sun Chang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Michael P. Donohoe (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Theodore Sougiannis

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

360 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0555 (Phone)
217-244-0902 (Fax)

Paper statistics

Abstract Views
547