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Do analysts understand the economic and reporting complexities of derivatives?

Author

Listed:
  • Chang, Hye Sun
  • Donohoe, Michael
  • Sougiannis, Theodore

Abstract

We investigate whether and how the complexity of derivatives influences analysts׳ earnings forecast properties. Using a difference-in-differences design, we find that, relative to a matched control sample of non-users, analysts׳ earnings forecasts for new derivatives users are less accurate and more dispersed after derivatives initiation. These results do not appear to be driven by the economic complexity of derivatives, but rather the financial reporting of such economic complexity. Overall, despite their financial expertise, analysts routinely misjudge the earnings implications of firms׳ derivatives activity. However, we find evidence that a series of derivatives accounting standards has helped analysts improve their forecasts over time.

Suggested Citation

  • Chang, Hye Sun & Donohoe, Michael & Sougiannis, Theodore, 2016. "Do analysts understand the economic and reporting complexities of derivatives?," Journal of Accounting and Economics, Elsevier, vol. 61(2), pages 584-604.
    • Handle: RePEc:eee:jaecon:v:61:y:2016:i:2:p:584-604
    DOI: 10.1016/j.jacceco.2015.07.005
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    More about this item

    Keywords

    Derivatives; Economic complexity; Reporting complexity; Hedging; Sell-side analysts; Earnings forecasts;
    All these keywords.

    JEL classification:

    • G29 - Financial Economics - - Financial Institutions and Services - - - Other
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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