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Comparing Alternative Hedge Accounting Standards: Shareholders' Perspective

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Listed:
  • Nahum D. Melumad

    (Columbia University)

  • Guy Weyns

    (Goldman Sachs)

  • Amir Ziv

    (Columbia University)

Abstract

We study the economic consequences of alternative hedge accounting rules in terms of managerial hedging decisions and wealth effects for shareholders. The rules we consider include the “fair-value” and “cash-flow” hedge accounting methods prescribed by the recent SFAS No. 133. We illustrate that the accounting method used influences the manager's hedge decision. We show that under no-hedge accounting, the hedge choice is different from the optimal economic hedge the firm would make under symmetric and public information. However, under a certain definition of fair-value hedge accounting, the hedging decision preserves the optimal economic hedge. We then demonstrate that long-term and future shareholders prefer a certain definition of fair-value hedge accounting to no-hedge accounting, while short-term shareholders prefer either approach depending on risk preferences and the level of uncertainty. We speculate about circumstances in which a manager would choose not to adopt fair-value hedge accounting when he has the option not to do so.

Suggested Citation

  • Nahum D. Melumad & Guy Weyns & Amir Ziv, 1999. "Comparing Alternative Hedge Accounting Standards: Shareholders' Perspective," Review of Accounting Studies, Springer, vol. 4(3), pages 265-292, December.
    • Handle: RePEc:spr:reaccs:v:4:y:1999:i:3:d:10.1023_a:1009638302403
    DOI: 10.1023/A:1009638302403
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    References listed on IDEAS

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    1. DeMarzo, Peter M & Duffie, Darrell, 1995. "Corporate Incentives for Hedging and Hedge Accounting," The Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 743-771.
    2. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. "Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-1658, December.
    3. Bray, Margaret M, 1981. "Futures Trading, Rational Expectations, and the Efficient Markets Hypothesis," Econometrica, Econometric Society, vol. 49(3), pages 575-596, May.
    4. Bray, Margaret, 1985. "Rational Expectations, Information and Asset Markets: An Introduction," Oxford Economic Papers, Oxford University Press, vol. 37(2), pages 161-195, June.
    5. Grossman, Sanford J, 1976. "On the Efficiency of Competitive Stock Markets Where Trades Have Diverse Information," Journal of Finance, American Finance Association, vol. 31(2), pages 573-585, May.
    6. Cox, John C. & Ingersoll, Jonathan Jr. & Ross, Stephen A., 1981. "The relation between forward prices and futures prices," Journal of Financial Economics, Elsevier, vol. 9(4), pages 321-346, December.
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    Cited by:

    1. John S. Hughes & Jennifer L. Kao & Michael Williams, 2002. "Public Disclosure of Forward Contracts and Revelation of Proprietary Information," Review of Accounting Studies, Springer, vol. 7(4), pages 459-478, December.
    2. Stephen Makar & Li Wang & Pervaiz Alam, 2013. "The mixed attribute model in SFAS 133 cash flow hedge accounting: implications for market pricing," Review of Accounting Studies, Springer, vol. 18(1), pages 66-94, March.
    3. Jeremy Bertomeu & Robert P. Magee, 2015. "Political pressures and the evolution of disclosure regulation," Review of Accounting Studies, Springer, vol. 20(2), pages 775-802, June.

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