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Does fair value reporting affect risk management? International survey evidence

Lins, Karl V., Servaes, Henri and Tamayo, Ane (2012) Does fair value reporting affect risk management? International survey evidence. Financial Management, 40 (3). p. 2011. ISSN 1471-9185

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Abstract

We survey CFOs from 36 countries to examine whether and how firms altered their risk management policies when fair value reporting standards for derivatives were introduced. A substantial fraction of firms (42%) state that their risk management policies have been materially affected by fair value reporting. Firms are more likely to be affected if they seek to use risk management to reduce the volatility of earnings relative to cash flows and if they operate in countries where accounting numbers are more likely to be used in contracting. We document a substantial decrease in foreign exchange hedging and in the use of nonlinear hedging instruments. Finally, firms that take active positions are more likely to be affected by fair value reporting. Taken together, our evidence indicates that requirements to report derivatives at fair values have had a material impact on derivative use; while speculative activities have been reduced, sound hedging strategies have been compromised as well.

Item Type: Article
Official URL: http://onlinelibrary.wiley.com/journal/10.1111/%28...
Additional Information: © 2011 Financial Management Association
Library of Congress subject classification: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HF Commerce > HF5601 Accounting
Sets: Departments > Accounting
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 16 Jan 2012 16:18
URL: http://eprints.lse.ac.uk/41514/

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