Corporate Hedging and Optimal Disclosure

This paper considers the issue of disclosure of hedging choices. It is shown that disclosure is the preferred choice of both managers and shareholders if it removes completely the informational asymmetry among the manager and the shareholders concerning the business opportunities and risks faced by them; the optimal reward cum insurance contract for the manager can thereby implemented. If the nature of feasible disclosure (that is credible) still leaves some informational asymmetries present, then with the renegotiation of managerial contracts at the interim date, it is possible to have the shareholders preferring nondisclosure, whereas the manager prefers to disclose at the (some) interim state(s), even though he might also prefer to commit to a policy of non-disclosure ex ante. These results are quite new relative to the extant literature on hedge accounting, and take sophisticated account of the impact of optional contracts for managers, and renegotiations of these at the interim (post-disclosure) date.