Derivatives Use and its Consequences for Management Earnings Forecasts

48 Pages Posted: 21 Apr 2020

See all articles by John L. Campbell

John L. Campbell

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

Sean Cao

Georgia State University - J. Mack Robinson College of Business

Hye Sun Chang

Singapore Management University - School of Accountancy

Raluca Chiorean

Lehigh University - Department of Accounting

Date Written: April 17, 2020

Abstract

This study examines whether firms’ risk management policies (i.e., the use of derivatives to hedge firm risk) are associated with the frequency and informativeness of management earnings forecasts. We offer three main results. First, we find that management forecasts increase after firms begin using derivatives; however, the increase only occurs when managers use derivatives to reduce the volatility of earnings. This suggests that managers only increase the frequency of their forecasts when they use derivatives in a way that makes it easier to predict future performance. Second, we find these effects are larger when managers have pronounced career concerns and a lower tolerance for missing previously issued forecasts. This suggests that, when managers otherwise face high disclosure costs, they only provide forecasts when derivatives use makes it easier to predict future earnings. Finally, we find that when managers use derivatives in a way that decreases ex-ante earnings uncertainty (i.e., to hedge volatility risk), their forecasts do not alter analysts’ perceptions of future earnings. This suggests that the previously documented increase in forecast frequency does not appear to be valuable to capital market participants. However, when managers use derivatives in a way that increases ex-ante earnings uncertainty (i.e., to speculate), we find that their forecasts have high informational value to analysts. Overall, we find that derivatives use impacts managers’ disclosure choices, and that managers do not appear to increase disclosures in response to investor demand when their personal disclosure cost is high.

Keywords: risk management, derivatives, management forecasts, analyst forecasts

JEL Classification: G23, G32, M41

Suggested Citation

Campbell, John L. and Cao, Sean S. and Chang, Hye Sun and Chiorean, Raluca, Derivatives Use and its Consequences for Management Earnings Forecasts (April 17, 2020). Available at SSRN: https://ssrn.com/abstract=3578560 or http://dx.doi.org/10.2139/ssrn.3578560

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 - J. Mack Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
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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