Does mandatory recognition of derivatives and hedging activities influence investors’ uncertainty and diversity of opinion? The moderating role of product market competition

Abstract

ABSTRACT The International Accounting Standard No. 39 and the Statement of Financial Accounting Standard No. 133 were issued to address investors’ concerns regarding the reporting requirements for derivatives and hedging activities. I examine the influence of derivatives recognition, as required by SFAS 133, on investors’ uncertainty and diversity of opinion about the cash flow implications of underlying market rate changes. Using a sample of firms included in the S&P 500 Index, I find a decline in investors’ uncertainty and diversity of opinion after the adoption of SFAS 133 for users of derivatives. Furthermore, I find that investors’ uncertainty and diversity of opinion after the adoption of SFAS 133 is higher for users of derivatives operating in highly competitive industries compared to in less competitive industries. Overall, the study highlights the importance of considering a firm’s competitive environment when implementing recognition practices related to derivatives and hedging activities.