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Asymmetric information and corporate derivatives use
Author(s) -
Dadalt Peter,
Gay Gerald D.,
Nam Jouahn
Publication year - 2002
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.2216
Subject(s) - earnings , economics , information asymmetry , currency , dispersion (optics) , financial economics , econometrics , monetary economics , microeconomics , finance , physics , optics
Abstract We investigate the relationship between derivatives use and the extent of asymmetric information faced by thefirm. Using alternative analyst forecast proxies for asymmetric information, we find evidence that both the use ofderivatives and the extent of derivatives usage is associated with lower asymmetric information. Specifically, forfirms using derivatives (notably currency derivatives) we find that analysts' earnings forecastshave significantly greater accuracy and lower dispersion. These findings support the conjectures of DeMarzo andDuffie (1995) and Breeden and Viswanathan (1998) who argue that hedging reduces noise relatedto exogenous factors and hence decreases the level of asymmetric information regarding a firm's earnings.© 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22: 241–267, 2002