49 Pages Posted: 12 Sep 2017
Date Written: September 9, 2017
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: 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