Derivative disclosures and managerial opportunism

He, Guanming; Ren, Helen Mengbing

Abstract

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.

Citation

He, G., & Ren, H. M. (2023). Derivative disclosures and managerial opportunism. Journal of Futures Markets, https://doi.org/10.1002/fut.22472

• 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
• DOI: https://doi.org/10.1002/fut.22472
• Keywords: insider trading, business risk, hedging, derivative disclosures, crash risk, information asymmetry
• Public URL: https://durham-repository.worktribe.com/output/1810399