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Asymmetric information and corporate derivatives use

Peter Dadalt, Gerald D. Gay and Jouahn Nam

Journal of Futures Markets, 2002, vol. 22, issue 3, 241-267

Abstract: We investigate the relationship between derivatives use and the extent of asymmetric information faced by the firm. Using alternative analyst forecast proxies for asymmetric information, we find evidence that both the use of derivatives and the extent of derivatives usage is associated with lower asymmetric information. Specifically, for firms using derivatives (notably currency derivatives) we find that analysts' earnings forecasts have significantly greater accuracy and lower dispersion. These findings support the conjectures of DeMarzo and Duffie (1995) and Breeden and Viswanathan (1998) who argue that hedging reduces noise related to exogenous factors and hence decreases the level of asymmetric information regarding a firm's earnings. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22: 241–267, 2002

Date: 2002
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