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The Effects of Derivatives Use on Management Forecast Behavior

49 Pages Posted: 12 Sep 2017  

John L. Campbell

University of Georgia - J.M. Tull School of Accounting

Sean Cao

Georgia State University - School of Accountancy

Hye Sun Chang

Singapore Management University - School of Accountancy

Raluca Chiorean

Lehigh University - Department of Accounting

Date Written: September 9, 2017

Abstract

Prior research examines the reasons that managers decide to voluntarily disclose information, but does little to examine whether a manager’s day-to-day operational decisions influence disclosure choice. In this study, we fill this void by examining whether a particular operational activity – risk management through the use of derivatives – affects whether a manager decides to issue an earnings forecast. Using a hand-collected sample of derivatives users and non-users, we find that derivatives users are more likely to issue earnings forecasts relative to non-users. We then find that this result is stronger when firms use derivatives to reduce the volatility of earnings, making it easier to predict (and meet) future earnings amounts. However, we find no evidence that managers provide these forecasts due to investor demand. In additional analyses, we find that not only are derivatives users more likely to issue management forecasts but these forecasts are also more precise and accurate. Overall, our results suggest that operational decisions can influence management forecast policy, but only when these decisions make it easier for the manager to forecast (and meet) those forecasts.

Keywords: voluntary disclosure, management forecasts, derivatives, hedge accounting

Suggested Citation

Campbell, John L. and Cao, Sean and Chang, Hye Sun and Chiorean, Raluca, The Effects of Derivatives Use on Management Forecast Behavior (September 9, 2017). Available at SSRN: https://ssrn.com/abstract=3034651

John L. Campbell (Contact Author)

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706.542.3595 (Phone)
706.542.3630 (Fax)

Sean S. Cao

Georgia State University - School of Accountancy ( email )

P.O. Box 4050
Atlanta, GA 30302-4050
United States

Hye Sun Chang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Raluca Chiorean

Lehigh University - Department of Accounting ( email )

United States

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