Premium
Does Fair Value Reporting Affect Risk Management? International Survey Evidence
Author(s) -
Lins Karl V.,
Servaes Henri,
Tamayo Ane
Publication year - 2011
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2011.01152.x
Subject(s) - fair value , business , volatility (finance) , accounting , risk management , value (mathematics) , earnings , earnings management , cash flow , survey data collection , actuarial science , affect (linguistics) , monetary economics , economics , finance , statistics , mathematics , linguistics , philosophy , machine learning , computer science
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.