Discussion of Hedge Disclosures, Future Prices, and Production Distortions

Abstract

Kanodia, Mukherji, Sapra, and Venugopalan (henceforth KMSV) study a model of hedge disclosures. The approach (see Kanodia [1999] for a discussion) considers how economic decisions may be affected by accounting measurement and disclosure policies. KMSV study how hedge disclosures affect the informational efficiency of a futures market, which in turn affects the production decisions of individual firms. This approach represents a significant departure from prior research on real effects of hedge accounting, which focuses primarily on how a firm's decision to hedge is affected by accounting standards. DeMarzo and Duffie [1995] and Jorgensen [1997], for example, consider models in which different hedge accounting regimes result in different measures that can be used to assess managerial ability. Similarly, Melumad, Weyns, and Ziv [1999] examine the effects of hedge accounting on firm valuation at an interim date. As noted by KMSV, common to all three earlier papers is the notion that hedge accounting regimes affect individual manager or firm decisions and result in private benefits and costs to those managers and firms. The KMSV paper is based on a separation result originally derived by Danthine [1978]. Danthine examines the production decisions of commodity producers with access to a futures market for their product. Speculators in the futures market have information about demand for the product, and this information is ultimately reflected in the futures