The informativeness of derivatives use: Evidence from corporate disclosure through public announcements

We provide new evidence on the determinants of corporate derivatives use by studying how markets respond to announcements of changes in derivatives positions by gold-mining firms. Announcements of increases or decreases in derivatives positions are associated with, respectively, negative or positive reactions in equity prices for both the announcing firm and other gold-mining firms, and, respectively, negative or positive reactions in the gold market. The reactions in the gold market and stock market (both firm and industry) are significantly more positive or negative, respectively, when firms explicitly state that they are decreasing or increasing derivatives positions due to changes in their market views of future gold prices. We help bridge an important gap in the literature by providing evidence consistent with some firms possessing credible private information that underlies changes in their derivatives positions, despite the absence of documented shareholder benefits created by firms that engage in selective hedging. Our findings also provide support for distress-cost minimization as a rationale for corporate derivatives use.