Title

Comparing Alternative Hedge Accounting Standards: Shareholders’ Perspective

Publication Type

Journal Article

Publication Date

1999

Abstract

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.

Keywords

Finance, Business and Banking

Discipline

Accounting | Corporate Finance | Finance and Financial Management

Research Areas

Financial Performance Analysis

Publication

Review of Accounting Studies

Volume

4

Issue

4

First Page

265

Last Page

292

ISSN

1380-6653

Identifier

10.1023/A:1009638302403

Publisher

Springer

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