Impact of cash flow hedge accounting on future profitability and stock returns: A cross-country comparison

This study examines the association between unrealized cash flow hedge (CFH) and future profitability and stock returns outside the United States. Using a panel of 2832 non-financial firms from 44 countries during 2005–2023, we examine whether unrealized CFH predict future profitability and stock returns. We find evidence broadly consistent with U.S. studies prior to IFRS 9 in 2018. Specifically, in this period, unrealized CFH balances are negatively associated with subsequent changes in profitability. However, investors in non-U.S. firms appear to price the implications of unrealized CFH for future profitability more slowly than investors in U.S. firms. After IFRS 9 in 2018, the results hinge critically on whether firms' hedge positions are in a net a distinction not previously documented in U.S. settings. Specifically, we find that firms with large unrealized CFH losses experience higher future profitability and positive future stock returns, whereas firms with large unrealized CFH gains show no association with future profitability. Furthermore, we continue to find delayed investor pricing. All results are stronger for firms from emerging markets. Overall, the evidence suggests that investors in non-U.S. markets face greater challenges in understanding the implications of unrealized CFH for future performance. This difficulty may reflect differences in disclosure regimes or a broader difficulty in processing the complex relationship between hedge accounting outcomes, future cash flows, and firm value. Collectively, our findings highlight that unrealized CFH contain economically meaningful, forward-looking information, but that their profitability and valuation effects depend critically on accounting regimes and institutional environments.