EconPapers    
Economics at your fingertips  
 

Hedging and hedging effectiveness under required disclosures: a study of the impact of derivatives use on capital investment

Hong V. Nguyen ()
Additional contact information
Hong V. Nguyen: University of Scranton

Journal of Economics and Finance, 2018, vol. 42, issue 3, No 3, 491 pages

Abstract: Abstract The purpose of this paper is to study the impact of derivatives use on corporate capital expenditures by utilizing reporting changes under the disclosure requirements of the Statement of Financial Accounting Standards 133 (SFAS 133). The standard requires firms to recognize and report the use of derivatives in their financial statements, including its purpose and its hedging effectiveness. This greater transparency is expected to incentivize firms toward demonstrating greater effectiveness in their derivatives use for hedging purposes. The literature on the real consequences of derivatives use is limited, probably due to the difficulty of ascertaining its hedging effectiveness in addition to its purpose, which is made possible under SFAS 133. Since effective hedging reduces risk exposure, lowers the costs of financial distress, and mitigates underinvestment, it can have a real effect in the form of raising the level of capital investment. The research in this paper distinguishes itself from earlier studies in linking derivatives use to hedging and hedging effectiveness in its study of the impact of derivatives use on capital investment. I find evidence supporting a positive effect of derivatives use on capital investment. Additionally, a lower risk exposure that can be linked to hedging effectiveness, as it is under SFAS 133, is shown to have a positive impact on capital investment. From a policy standpoint, the results suggest that required disclosures may have a real impact if they provide affected firms with an incentive to change their behavior while meeting the disclosure requirements.

Keywords: Capital expenditures; Derivatives use; Hedging; Hedging effectiveness; Risk exposure; Statement of financial accounting Standards 133; Required disclosures (search for similar items in EconPapers)
JEL-codes: D84 G32 M48 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s12197-017-9399-5 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:jecfin:v:42:y:2018:i:3:d:10.1007_s12197-017-9399-5

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/12197/PS2

DOI: 10.1007/s12197-017-9399-5

Access Statistics for this article

Journal of Economics and Finance is currently edited by James Payne

More articles in Journal of Economics and Finance from Springer, Academy of Economics and Finance Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().

 
Page updated 2025-03-20
Handle: RePEc:spr:jecfin:v:42:y:2018:i:3:d:10.1007_s12197-017-9399-5