The impact of hedging with derivative instruments on reported earnings volatility

摘要

This study uses a regression model and seeks to find an association between lower earnings volatility (dependent variable) and the use of hedging with derivatives (independent variable). Prior to the Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, issued in 1998 and implemented in 2002, there was no way to examine the impact of hedging, with derivative instruments, on reported earnings volatility without observing footnote disclosures. The results of the study indicate a strong association between the low reported earnings volatility and the firm use of derivative instruments for hedging. This study also indicates that the effectiveness in smoothing reported earnings by using cash flow hedging and the associated hedge accounting increases over the 8-year study period, after the implementation of SFAS No. 133, perhaps suggesting a learning curve for firm use.