Comparing Alternative Hedge Accounting Standards: Shareholders' Perspective

Nahum D. Melumad, Guy Weyns and Amir Ziv
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Nahum D. Melumad: Columbia University
Guy Weyns: Goldman Sachs
Amir Ziv: Columbia University

Review of Accounting Studies, 1999, vol. 4, issue 3, No 10, 265-292

Abstract: 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.

Keywords: Public Finance; Economic Consequence; Public Information; Risk Preference; Account Standard (search for similar items in EconPapers)
Date: 1999
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DOI: 10.1023/A:1009638302403

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