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Fair Value Accounting and Managers' Hedging Decisions
Author(s) -
CHEN WEI,
TAN HUNTONG,
WANG ELAINE YING
Publication year - 2013
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/j.1475-679x.2012.00468.x
Subject(s) - fair value , mark to market accounting , accounting , earnings , accounting information system , economics , value (mathematics) , salience (neuroscience) , management accounting , volatility (finance) , historical cost , business , financial accounting , actuarial science , financial economics , psychology , machine learning , computer science , cognitive psychology
We conduct two experiments with experienced accountants to investigate how fair value accounting affects managers’ real economic decisions. In experiment 1, we find that participants are more likely to make suboptimal decisions (e.g., forgo economically sound hedging opportunities) when both the economic and fair value accounting impact information is presented than when only the economic impact information is presented, or when both the economic and historical cost accounting impact information is presented. This adverse effect of fair value accounting is more likely when the price volatility of the hedged asset is higher, which is a situation where, paradoxically, hedging is more beneficial. We find that the effect is mediated by participants’ relative considerations of economic factors versus accounting factors (e.g., earnings volatility). Experiment 2 shows that enhancing salience of economic information or separately presenting net income not from fair value remeasurements reduces the adverse effect of fair value accounting. Our findings are informative to standard setters in their debate on the efficacy of fair value accounting.