Asymmetric Information and Corporate Derivatives Use
36 Pages Posted: 19 Feb 2002
Date Written: July 10, 2001
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: Suggested Citation