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Derivative disclosures and managerial opportunism

He, Guanming; Ren, Helen Mengbing

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Helen Mengbing Ren


Derivatives are increasingly used by managers not only to hedge risks but also to pursue nonhedging activities for fulfilling opportunistic incentives. The Statement of Financial Accounting Standards No. 161 (SFAS 161) requires firms to disclose their objectives and strategies for using derivatives. Using the adoption of this standard, we examine whether and how derivative disclosures influence managerial opportunistic behavior. We employ insider trades and stock price crash risk to capture managerial opportunism. Applying a difference‐in‐differences research design with hand‐collected data on derivative designations, we find that, after the implementation of SFAS 161, derivative users that comply with SFAS 161 experience a significantly greater decrease in both insider trades and stock price crash risk, compared with a matched control sample of nonderivative‐users. We further provide evidence to suggest that SFAS 161 curbs managerial opportunism via reducing information asymmetry between corporate insiders and outside investors and enhancing the effectiveness of derivative hedging.

Journal Article Type Article
Acceptance Date Oct 20, 2023
Online Publication Date Nov 17, 2023
Publication Date 2023
Deposit Date Oct 21, 2023
Publicly Available Date Nov 17, 2023
Journal Journal of Futures Markets
Print ISSN 0270-7314
Electronic ISSN 1096-9934
Publisher Wiley
Peer Reviewed Peer Reviewed
Keywords insider trading, business risk, hedging, derivative disclosures, crash risk, information asymmetry
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