Asymmetric Information and Corporate Derivatives Use

36 Pages Posted: 19 Feb 2002

See all articles by Peter J. DaDalt

Peter J. DaDalt

Susquehanna University

Gerald D. Gay

Georgia State University - Department of Finance

Jouahn Nam

Pace University - Lubin School of Business

Date Written: July 10, 2001

Abstract

We investigate the relationship between derivatives use and the extent of asymmetric information faced by the firm. Using alternative analyst forecast proxies for asymmetric information, we find evidence that both the use of derivatives and the extent of derivatives usage is associated with lower asymmetric information. Specifically, for firms using derivatives (notably currency derivatives) we find that analysts' earnings forecasts have significantly greater accuracy and lower dispersion. These findings support the conjectures of DeMarzo and Duffie (1995) and Breeden and Viswanathan (1998) who argue that hedging reduces noise related to exogenous factors and hence decreases the level of asymmetric information regarding a firm's earnings.

Keywords: Risk management; Information asymmetry; Hedging; Derivatives

JEL Classification: G13, G14, G31, G32, D82

Suggested Citation

DaDalt, Peter J. and Gay, Gerald D. and Nam, Jouahn, Asymmetric Information and Corporate Derivatives Use (July 10, 2001). Available at SSRN: https://ssrn.com/abstract=300543 or http://dx.doi.org/10.2139/ssrn.300543

Peter J. DaDalt (Contact Author)

Susquehanna University ( email )

Selinsgrove, PA 17870
United States
5703724524 (Phone)

Gerald D. Gay

Georgia State University - Department of Finance ( email )

Robinson College of Business
Atlanta, GA 30303-3083
United States
404-413-7321 (Phone)
404-413-7312 (Fax)

Jouahn Nam

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States
212-346-1818 (Phone)
212-346-1573 (Fax)

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