Abstract

https://ssrn.com/abstract=2634201
 


 



Do Analysts Understand the Economic and Reporting Complexities of Derivatives?


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

July 21, 2015

Journal of Accounting & Economics (JAE), Forthcoming

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


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Date posted: July 23, 2015  

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

Contact Information

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)
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