Hedge accounting choice as exchange loss avoidance under financial crisis: Evidence from Brazil

Abstract

Cash flow hedge accounting is an accounting choice and may avoid reported losses due to deferrals in other comprehensive income (OCI), promoting better earnings disclosure. Provided that managers have incentives to avoid losses, we investigate whether firms' high financial exposure to currency risk, the high exchange rate depreciation derived from the financial crisis verified in Brazil, and the option to defer taxes on exchange earnings affected hedge accounting choice for 379 Brazilian listed firms from 2010–2017. Our results provide compelling evidence of loss avoidance and tax-aggressiveness through cash flow hedge accounting choice, primarily designed by standards to reduce volatility instead.