Corporate Incentives for Hedging and Hedge Accounting

REVIEW OF FINANCIAL STUDIES, Vol 8 No 3

Posted: 25 Aug 1998

See all articles by Peter M. DeMarzo

Peter M. DeMarzo

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Canadian Derivatives Institute

Abstract

This paper explores the information effect of financial risk management. Financial hedging improves the informativeness of corporate earnings as a signal of management ability and project quality by eliminating extraneous noise. Managerial and shareholder incentives regarding information transmission may differ, however, leading to conflicts regarding an optimal hedging policy. We show that these incentives depend on the accounting information made available by the firm. Under some circumstances, if hedge transactions are not disclosed (i.e., firms report only aggregate earnings), managers hedge to achieve greater risk reduction than they would if full disclosure were required. In these cases, it is optimal for shareholders to request only aggregate accounting reports.

JEL Classification: M40

Suggested Citation

DeMarzo, Peter M. and Duffie, James Darrell, Corporate Incentives for Hedging and Hedge Accounting. REVIEW OF FINANCIAL STUDIES, Vol 8 No 3, Available at SSRN: https://ssrn.com/abstract=6620

Peter M. DeMarzo (Contact Author)

Stanford Graduate School of Business ( email )

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HOME PAGE: http://www.stanford.edu/people/pdemarzo

National Bureau of Economic Research (NBER)

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James Darrell Duffie

Stanford University - Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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United States

Canadian Derivatives Institute ( email )

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Canada

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