Comparing Alternative Hedge Accounting Standards: Shareholders’ Perspective
We study the economic consequences of alternative hedge accounting rules in terms of managerial hedging decisions and wealth effects for shareholders. The rules we consider include the “fair-value” and “cash-flow” hedge accounting methods prescribed by the recent SFAS No. 133. We illustrate that the accounting method used influences the manager's hedge decision. We show that under no-hedge accounting, the hedge choice is different from the optimal economic hedge the firm would make under symmetric and public information. However, under a certain definition of fair-value hedge accounting, the hedging decision preserves the optimal economic hedge. We then demonstrate that long-term and future shareholders prefer a certain definition of fair-value hedge accounting to no-hedge accounting, while short-term shareholders prefer either approach depending on risk preferences and the level of uncertainty. We speculate about circumstances in which a manager would choose not to adopt fair-value hedge accounting when he has the option not to do so.
Finance, Business and Banking
Accounting | Corporate Finance | Finance and Financial Management
Financial Performance Analysis
Review of Accounting Studies
WEYNS, Guy Joseph Mathilde; Melumad, Nahum D.; and Ziv, Amir.
Comparing Alternative Hedge Accounting Standards: Shareholders’ Perspective. (1999). Review of Accounting Studies. 4, (4), 265-292. Research Collection School Of Accountancy.
Available at: http://ink.library.smu.edu.sg/soa_research/1243