Bond Market Reaction to the Voluntary Disclosure of Firms' Usage of Derivatives

Abstract

This study investigates the private information in firms' voluntary disclosure of firms' derivative usage. Using textual analysis to capture the disclosure of derivative usage in the 10-K reporting, we find a strong positive relationship between firms' voluntary disclosure quantity on derivative usage and bond yield and bond volatility in the secondary market. Our results are robust to alternative measures of the disclosure of derivative usage, alternative samples, and endogeneity controls. Further, we find that this positive relationship is weaker in the period after the implementation of the Dodd-Frank Act, suggesting that bond market participants are less concerned about the adverse selection in voluntary disclosure when greater market transparency from regulation reduces opportunities for hidden and unethical speculation. This effect exists not only for firms in the financial sector but also for firms in all other sectors. Additional crosssectional analyses show that the observed positive relationship is more pronounced in firms with low hedging demand, low cash holdings, and high financial constraints.

Keywords: Voluntary Disclosure, Hedging, Financial Derivatives, Bond Yield, Bond Volatility

JEL Classification: G10, G12, G30, G32