Do analysts understand the economic and reporting complexities of derivatives?

Hye Sun Chang, Michael Donohoe and Theodore Sougiannis

Journal of Accounting and Economics, 2016, vol. 61, issue 2, 584-604

Abstract: We investigate whether and how the complexity of derivatives influences analysts׳ earnings forecast properties. Using a difference-in-differences design, we find that, relative to a matched control sample of non-users, analysts׳ earnings forecasts for new derivatives users are less accurate and more dispersed after derivatives initiation. These results do not appear to be driven by the economic complexity of derivatives, but rather the financial reporting of such economic complexity. Overall, despite their financial expertise, analysts routinely misjudge the earnings implications of firms׳ derivatives activity. However, we find evidence that a series of derivatives accounting standards has helped analysts improve their forecasts over time.

Keywords: Derivatives; Economic complexity; Reporting complexity; Hedging; Sell-side analysts; Earnings forecasts (search for similar items in EconPapers)
JEL-codes: G29 G32 M41 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (35)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:61:y:2016:i:2:p:584-604

DOI: 10.1016/j.jacceco.2015.07.005

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