Performance of financial hedging and earnings management under diverse corporate information quality

Chin-Wen Hsin, Feng-Yi Chang and Shin-Rong Shiah-Hou

International Review of Economics & Finance, 2024, vol. 91, issue C, 782-810

Abstract: Firm managers may choose accruals management (AM) or financial hedging with derivatives (FD) as risk management tools. This study simultaneously considers both tools and tests whether corporate information quality regulates the value effect derived from AM or FD. Our evidence finds that AM practices add values to those firms with quality corporate information. This could be explained by i) the greater added value from smoothed earnings when firms with superior information quality are more efficient in communicating with investors and thus enhance the value effect, and/or by ii) the increased value from mitigating agency issues when firms with better information quality are subject to less agency cost, impose lower information risks for investors, and discourage managerial self-serving motives in their AM practices. Conversely, FD usages, measured using hand-collected data, do not create values for most firms and quality corporate information only deteriorates such negative effect. This arises when hedging practices are ineffective and costly and when quality information only helps revealing to investors such messages. Our findings are robust to alternative measures of information quality, to the omission of financial crisis period, and to the sample exclusion of firms with extreme characteristics.

Keywords: Financial hedging; Earnings management; Firm value; Corporate information quality (search for similar items in EconPapers)
JEL-codes: G30 G32 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:91:y:2024:i:c:p:782-810

DOI: 10.1016/j.iref.2024.01.058

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