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The Effects of Risk Management on Management Forecast Behavior

50 Pages Posted: 12 Sep 2017 Last revised: 27 Nov 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: November 24, 2017

Abstract

Prior research examines several reasons why managers voluntarily disclose information, but provides relatively little evidence as to whether day-to-day operational decisions influence a manager’s disclosure choice. In this study, we examine whether a particular operational activity – risk management through the use of derivatives – affects whether a manager decides to issue earnings forecasts. Using a large 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 the use of derivatives makes it less costly for managers to issue forecasts and to meet or beat those forecasted earnings. Interestingly, however, we find no evidence that managers provide these forecasts when investors are more likely to demand them. Overall, our results suggest that operational decisions can influence management forecast policy, but only when these decisions make it easier for the managers to predict future earnings. This study thus provides evidence that voluntary disclosure has a role, but with limitation, in helping investors understand the complexity of derivatives.

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 Risk Management on Management Forecast Behavior (November 24, 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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